Which loan? A choice to be made carefully
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Choice in any market is a good thing, a sign of health and vitality and something to be enjoyed. However, choice means that at some point you are going to have to make a decision and to do that you must be aware of the market you are entering. This is all stating the obvious but is very important in the loan market where choice is abundant and mistakes are costly and often irreversible
The first important point to recognise is the division between a secured and unsecured loan. Secured loans have much lower interest rates but are often secured on people’s homes. They carry the risk that failure to repay will lead to eviction and homelessness as the house is repossessed by the lender. On the other hand unsecured loans are seen as high risk for the lender and are therefore more expensive. It is important to decide whether you value risk or cost more highly before you make the decision to have a secured or unsecured loan.
With a market as cluttered as the personal loan market in the UK it is essential to compare as many deals as possible to find not just the lowest rate, but the deal that suits your specific circumstances best. Many UK supermarkets have recently entered the loan market and have some good introductory deals, although these are beginning to dry up as the global financial situation tightens.
Most loans are for a fixed period of time and borrowers usually have to pay a penalty charge if they repay the full amount before that period of time has elapsed. Flexible loans without a fixed time period are available but at higher rates of interest. If you think you could repay a loan early it is usually worth keeping the money to avoid a penalty charge, repaying at the arranged time and keeping the excess interest earned.
Another reason to check the small print on any loan contract is that different lenders have different ways to calculate their APR’s (annual percentage rates). This can effect comparisons and result in a worse deal for the consumer. It is especially important to note that comparisons should only ever be made between APR’s calculated in similar ways. Monthly rates and special deals are designed to make loans appear more attractive and less expensive than they really are.
The last point is that the borrower should always be aware of the total amount to be repaid. With interest rates varying between 7% and 20% this can make a big difference, any mistake in choosing a loan is going to be compounded over time and could mean borrowers are vastly out of pocket.
