At first sight, getting the best deal on a personal loan seems fairly simple: just have a look at the best buy tables, find the lender that’s offering the cheapest rate and make your application.
As ever when it comes to financial products – and borrowing in particular – in reality things are not quite so straightforward.
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How best-buy tables work
Best-buy tables online and in the press are certainly a good place to start but they don’t always tell the whole story.
Firstly, the tables tend to rank deals according to the rates on specific loans: so some tables will compare the rates for advances of, say £5,000 over three years.
Others might compare the cost of borrowing £10,000 over five years.
This is great if the sum and period matches your own requirements, but if you instead wish to borrow, for example, £3,000 over two years, these best-buy tables may not give you the full picture: a different provider may offer a better deal on the loan you are actually after.
Some price-comparison websites, however, let you vary the size and length of the loan, and then rank providers on this basis.
Loan types explained
Eligibility for the best rates
Another issue is that there is no guarantee you will be offered the rate a particular lender is advertising: the best rates tend to be reserved for people with clean credit histories.
If you have missed repayments in the past, you could have a black mark on your credit file which means lenders will charge you more – or reject your application altogether.
Before you apply, it is worth checking your credit file and dealing with any problems on it if necessary.
How to check your credit report
Changing the size and length of your loan
Another way to get a cheaper rate is by changing the amount you wish to borrow and/or the term of your loan.
As a rule, larger loans tend to have cheaper rates of interest and APRs (annual percentage rates). This is because the administration costs are the same regardless of the amount borrowed, so smaller loans have to be more expensive in order for providers to cover their costs.
If you want to borrow £6,000, for example, you might find you’ll get a much cheaper deal if you apply for £7,500 instead.
The length of the loan can also affect the rate: some providers offer cheaper rates on medium-term loans, such as those for two or three years, while one or five-year deals are more expensive. This can vary from one company to the next, so shop around to see what is more cost effective.
Bear in mind, however, that the longer you borrow for, the more interest charges you’re likely to pay in total. Other things being equal, the quicker you can pay off your loan, the cheaper it will be.
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