Top 5 Comparison Criteria for Bank Loans

15 September 2010
Whether you want to invest in a new kitchen before selling your house or need to consolidate several existing debts into one manageable monthly payment, bank loans can be a solution. But with so many money lenders on the market – each with their own, jargon-loaded small print – it can be a harrowing task to search for the appropriate funding option for your unique situation. The best way to compare them is by focusing on the following factors.

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.

2. Interest

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).

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