How to Find the Best Personal Loan

Written by Karen Bryan

£1 coin alternating stackHere are my tips for finding the best personal loans.

Look Out for Offers for Existing Customers

HSBC current account holders can access personal loans of between £7,500 – £15,000 at a rate of 4.8% over a period of 1 – 5 years. Holders of the Nectar loyalty card can access a Sainsbury’s Bank loan of between £5,000 – £7,500 at a rate of 6.3% over a period of 1 – 3 years.

Be Aware that Smaller Loans Charge a Higher Rate of Interest

The lowest rate of interest which I could find for a loan, available to anyone, of £1,000 to £1,999 was 19.9%. If the loan value increased to between £2,000 to £2,999, the rate dropped to 14.9%. Whereas on a loan of £15,000 – £25,000 the rate was 6.7%.

This may make you think that you’d be better to borrow a bit more to get a lower rate of interest. That may not be within your control, e..g you may only qualify for a smaller loan. While you may be better off increasing the amount of your loan by a few hundred pounds to get a lower rate of interest, you need to be sure that you can afford the monthly repayments.

The Quoted Rates of Interest Aren’t Available to Everyone

The rate of interest quoted on personal loans only has to be available to 51% of applicants. You may be accepted for a loan, but at a higher rate, if you don’t have a very good credit rating.

Choose the Shortest Possible Loan Term

While it may sound tempting to go for a longer loan term to lower monthly repayments, you’ll pay so much more in interest that this a false economy.

Watch Out For Early Repayment Penalties

If you have some extra cash, it could be a good idea to make higher monthly payments or pay off the loan early.  However, before doing this, check if there are any early repayment penalties.

It Could be Cheaper To Use a Credit Card

Some credit cards offers 0% interest on purchases for new customers, e.g  Santander gives you 18 months at 0%.  If you are borrowing to pay off a credit card debt, it could be a lot cheaper to do a balance transfer to a 0% credit card offer, e.g. Barclaycard do a 30 month 0% balance transfer with a fee of 2.85% (after cashback). You’ll still have to pay a transfer fee, typically 2.5%.

The disadvantage with these approaches is that you must be self disciplined enough to set aside enough money to pay off the balance when the 0% interest period finishes.

Ask Yourself If You Really Need This Loan

The best way to save money is not to take out the loan at all, especially if you are going to struggle to make the monthly repayments and risk getting pulled into a debt spiral.

Interest rates correct on 7 January 2013.