Personal loans provide a source of finance that can often be cheaper than credit cards or hire purchase agreements. However, as the type, cost, and terms of various personal loans can differ you should investigate your options carefully.

  • Decide between a secured loan and an unsecured loan. A secured loan is one where the borrower provides a valuable asset to the lender as collateral for the loan. With an unsecured loan the borrower in effect simply promises to pay back the loan and does not provide collateral. The fact that the lender holds nothing as security results in generally higher interest rates for unsecured loans.
  • Think about the term of your loan. Short term loans may attract higher interest rates than long term loans. However, making repayments over a shorter time period may mean that you pay less in total interest charges despite the higher rate.
  • Compare interest rates. These can vary markedly between lenders and it is worth shopping around. Calculate the total amount of interest you’ll pay over the life of the loan to find what the loan will really cost you.
  • Is the interest rate fixed or variable? A variable interest rate may be a bit of a gamble – you win if the interest rate falls, but you lose if it rises. A fixed interest rate has the advantage of allowing you to plan your repayments with a greater degree of certainty.
  • Watch out for loan fees. Almost all lenders charge these as a matter of course and you should add them to the interest you’ll be charged to determine the total cost of the loan. Ask the lender what annual percentage rate (APR) you’ll be paying. The APR combines all the fees the loan attracts with the interest rate and expresses it as an annual percentage. The APR is, therefore, a useful tool for comparing personal loans between lenders.
  • Make sure you know what the default rate for the loan is. The default rate is the interest rate or penalty you’ll pay if you miss or are late with a payment.

Remember that when deciding whether or not to grant your personal loan, the financial institution may consider factors such as your history with that institution, your income and length of employment, your past performance in repaying debt and your references. Generally, the better shape you are in financially, the more likely you are to obtain a personal loan at a competitive rate.

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