Personal loans can be amongst the cheapest way to borrow, but we can’t help but stress how important what the reason you are borrowing the money for.
If you are looking to finance a new flat screen television or go on holiday, or any other luxury, a personal loan is not your best option. Fortunately the financial crisis has made most people more aware of their finances and changed the way they think about borrowing.
More people are saving to buy life’s luxuries, and we are far less reliant on loans and credit for our spending.
If you need the money for something really important, then borrowing through a personal loan, is far cheaper than through the use of a credit card.
Here are five tips for personal loans.
Before starting the whole application process for a loan, you should check whether you have any cheaper options available for borrowing the money.
There are a couple of things you should think about first before borrowing from a bank, You should work out how much cash you really need, whether you can save the amount, and whether you can borrow the money you need from friends or family.
An easy way to borrow cheaply, is to use your credit card and for a small fee transfer the debt to a new zero per cent balance transfer card. For the introductory period, you will not have to pay any interest, but when that expires the amount can start racking up hefty interest, so you should be careful to make sure you know when the period expires, and set up a strategy to ensure you don’t exceed the period, whether that means transferring any balance remaining to a new card or having paid the amount off depends on you.
If you find that your only option happens to be a loan and have started shopping for one already, you should know that the “typical” low rates aren’t actually offered to everyone.
Lenders who advertise such rates, are not obliged by law to offer those rates to everyone and unsurprisingly only tend to offer them to a small percentage of their customers, who tend to have near perfect credit ratings.
If you don’t happen to have a perfect or near perfect credit history, then you have a very low chance of being offered the best rates in the market. Lenders will either turn you down or offer you the loan at a higher rate.
You should also be acutely aware that how often you apply for loans is noted by borrowers, and if they get a sense that you have tried to borrow money many times in a short period of time, that starts to send alarm bells ringing.
So make sure you apply for a credit report and have an idea of how clean your record is, before starting the application process for a loan.
Whenever you shop for a loan you should take your time and look for the best deal, as you would do for any other product.
Whilst many of you are familiar with the Annual Percentage Rate (APR), which is the rough rate of interest you pay annually for a loan, you should also be aware of the lesser known TAR.
TAR stands for Total Amount Repayable, and is an accurate indicator of how much the loan actually costs, and sometimes when you find out the true cost of a loan, it can be quite an eye opening experience.
Always check the TAR when comparing different loans with one another; it is the best way to ensure you are getting the best deal available to you.
Personal loans tend to be what is known as unsecured loans, that is to say they are not backed up by collateral. This differs with the secured loan which is backed by collateral such as your car or house.
Secured loans often seem to be cheaper than unsecured loans, but before jumping in, you should be aware that they often come with variable rates of interest. This means you run the risk of having your interest payments spike into something that becomes unaffordable.
They can make sense, but you should be careful to understand what the trend in interest rates happen to be, and whether you run the risk of them spiking before you have paid off the debt.
The best way to keep the cost of a personal loan down is to pick the shortest term you can possibly manage. Doing this ensures you pay the least amount in interest rate charges. Taking a look at the numbers as an illustration. The rule is the shorter you borrow money for, the less interest is charged.
Finally, after investigating TARs you’ve undoubtedly been suitably shocked at how much your seemingly cheap personal loan will cost. Assuming you borrowed $ 3000 at 7.9% APR
Paying back a $3k loan over 5 years would mean a total repayment of $3,641 – $641 obviously being interest.
Repay it over 3 years and it would cost $379 in interest saving $262.
And over 2 years it would cost you just $253 in interest, saving another $126.