Top five comparison criteria for bank loans
1. Credit card, secured or unsecured loan
For small, short-term loans, you can simply use your credit card. Unsecured loans are an option if you need a few thousand pounds. You can get better deals when it comes to interest rates if you are able and willing to secure the loan against your property, and you will also be able to borrow a larger sum. With both types of loans you will have to make monthly repayments. With an unsecured loan, late repayments will damage your credit rating, which will make it more difficult to take out loans, insurance or even a phone contract in the future. The stakes are a lot higher if you’ve got a secured loan, as missing out on payments could put your home at risk.
One of the most important topic when it comes to comparing loans is the total amount repayable (TAR). The amount of interest you will have to pay over the course of the loan can vary incredibly, even if the advertised percentages all appear quite similar. You should also find out whether the interest rate is fixed or variable. Most personal loans offer fixed rates, which is convenient because you’ll know from the start how much you will have to pay back in the future.
3. Monthly repayments and late fees
Low monthly repayments may sound attractive, but they are only possible if you take out a loan for a longer period, which will inevitably increase your TAR. Try to get your monthly repayments as high as you can afford – but no higher! If you can’t meet your monthly repayments, you will damage your credit rating. It’s also worth looking into what late fees different money lenders charge, just in case.
4. Early repayment opportunities
Believe it or not, lenders are allowed to charge up to two months' interest as a penalty when borrowers repay their debts early. So much for gratitude! If there is even the slightest possibility that you will repay your loan early, it’s important to look for a loan that won't penalize you for doing so. Seven out of ten people with a personal loan actually wish to speed up the repayment process at some point. That’s why it’s important to check whether you can make lump sum overpayments without being punished or losing benefits such as a cash back offer.
5. Cash back offers
If you’re absolutely confident that will be making all your monthly payments exactly on time for the agreed period, then it’s worth looking at cash back loans. By sticking to the original agreement, you can get a large percentage of your interest back by the time your loan comes you and end. But think twice before jumping at cash back offers: if you’re late with one of your repayments or pay off your debt early, you will lose the special benefits of this loan and might not have the best deal at all. Another catch to watch out for is that you will only be offered your cash back if you also buy Payment Protection Insurance (PPI).
Unsecured loans mean the loan is not secured on any asset you already own, such as a house, car or other assets and so is a riskier prospect for the lender. Therefore, they usually come with higher interest rates than their secured counterparts, are less flexible and levy high redemption penalties. Most “personal” loans are unsecured.
As the name suggests, secured loans require security, or “collateral”, usually in the form of property, a motor vehicle, or another valuable item, as a guarantee for the loan. This effectively reduces the level of risk to which a lender is exposed, as the lender has a claim against your home, or other effects, if you default. Secured loans are often available at competitive interest rates. Types of secured loans include mortgages, logbook loans and some types of hire purchase where the loan is secured on the goods you’re buying and these are repossessed if you default.
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.