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Two Tips For Taking A Personal Loan
Before taking out a personal loan here are three tips to lower the monthly repayments. The golden rule when it comes to borrowing money is, Keep the interest bill to a minimum by borrowing as little as you can for as short a time as possible.
It is also key, to read the small print in any loan agreement, so that the borrower is aware of any additional fees and charges. Consumers should never borrow more than they can afford, and although it is very difficult for a lender to try and repossess a house when they make an unsecured loan where the consumer starts defaulting. Defaulting on a personal loan will at the very least result in an adverse effect on a consumers credit score and at worst may result in legal action and even bankruptcy.
Here are three tips for minimizing the monthly repayment on a personal loan
1. Check the TAR, not the APR
Lenders, by law have to display the annual percentage rate (APR) for loans that they make to consumers. The APR is a rough guide an approximation of the amount of interest a borrower will have to pay for credit over the year.
APR’s are not perfect, the exact yearly interest rate is a complex mathematical calculation, and therefore the APR is used instead for its simplicity. APR’s however can be manipulated as a result. An example would be the use of repayment holidays which increase the time before the first repayment is due, which therefore brings down the APR, but at the same time increases the total interest bill.
APR’s should be checked before taking out a personal loan, but borrowers should pay more attention to the total amount repayable (TAR), which is the most accurate cost of a personal loan because it takes into consideration everything that the borrower must pay to the lender, totaling the interest bill, and any fees payable.
2. Watch out for tiered rates
It is cheaper to borrow larger amounts of money than smaller sums, that is to say that lenders charge their lowest interest rates to customers who borrow the largest amounts of money. May lenders have a tiered system of interest rates which fall as the customer borrows more money. For example the APR for a customer who borrows $5000 might be 9.9 per cent, which when the customer borrows over $10,000 drops to say 5.9 per cent.
Borrowers should seek to exploit this when borrowing money, and if they can increase the amount they borrow moderately enough, without materially affecting the amount the borrow, they can lower the total amount of interest payable. For example if the boundary for reduced rate of interest lies at $5000, say to borrow up to $5000 it costs 6.9 per cent, beyond which the interest rate drop a full percentage point. If a consumer is at the upper end of the boundary and they increase the amount borrowed moderately to $5,000 it could result in the whole loan becoming cheaper since the interest payable falls. Borrowers should be aware of the tiers in interest rate, and what the boundaries are for those rates to kick in before deciding how much to borrow.
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