Credit Crunch

Getting a loan – do’s and do nots

Many of us are finding that we need to take out loans to shore up our finances just now. Most companies who lend to those with a good credit rating are offering more or less similar deals at the moment, but if your credit rating is poor, you’re likely to pay heavily for your borrowing.

The 20 cheapest loan providers – for clients with a good credit rating – are offering loans that differ by only a couple of pounds in repayments overall. For example, if you borrow £10,000 over 5 years, your repayments will be between £198 and £201 per month.

When applying for a loan, it’s tempting to request more than you need – just so you have a reserve for the inevitable rainy day or maybe to treat yourself to something – however, this is a mistake in the long-term. It’s most likely that you’ll be tempted to borrow as much as the loan company will offer you, however it’s then equally tempting to fritter it away, and you’re left with no wriggle room to then increase your loan should it become necessary to do so.

It’s also a mistake to take the longest repayment term possible. It can be an attractive proposition to have lower monthly repayments but the longer the term of your loan, the more you end up paying back. You should also look to getting a fixed-rate loan, for while it is of course possible for rates to drop, they could equally go up very rapidly and so would your repayments.

Whenever possible, make sure you compare the TAR – that is, the total amount repayable – for each loan company. This will ensure that you know exactly how much you’re going to be paying back. Unlike the Annual Percentage Rate (APR) which can alter with interest rates, the TAR on a fixed-rate loan will give you a definite figure.

Try to choose a loan which is ‘flexible’. This means that you can make extra payments or settle the balance of your loan early if you’re able to. If your loan isn’t flexible, you may be charged extra for clearing the balance before its scheduled end date.

Always try to avoid taking out a secured loan, for as the adverts tell us in small print, your home may be at risk if you miss payments. Also, most secured loans have variable interest rates rather than fixed, so your payments could go up at any time.

There is usually very little to be gained by taking out payment protection insurance (PPI) and even though most companies will do their best to make you take it out, it’s usually far cheaper to take out protection with a different and independent provider.

Finally, if the reason you take out the loan is debt consolidation, make sure you actually do pay off your debts with the money, and once done, cut up your credit cards. It’s very tempting to simply pay off your cards and keep hold of them but you WILL end up running them up again!