How to Find the Cheapest Loan

Which Loan is Cheapest?

Credit unions

Credit unions are small mutual banks run and owned by their depositors, and based in a community or workplace. The rate of interest which you earn if you save with a credit union is lower than with a bank or building society, but you have access to a cheap source of loans.

• Credit union loans are one of the cheapest ways to borrow.

• The interest rate can be fixed or variable.

Insurance company loans

If you have a life insurance policy with a cash value, which usually means an endowment or whole-of-life policy, many insurance companies will lend money using the policy as security. The loan can be repaid whenever you want or you can pay it out of the proceeds of the life policy when it matures or when you decide to cash it in.

• Insurance policies are often a good source of cheap loans.

• The rate of interest can be fixed or variable.

Bank gold cards

Gold cards give you unlimited interest-free credit for a yearly charge, but the outstanding loan must be cleared once a month. Gold cards also give you access to bank overdrafts at cheaper than normal rates.

• If you can get a gold card (you have to have a high income), the overdraft facility can be a cheap way of borrowing.

• The interest rate is variable.

Secured loans

If you have owned your house for a number of years, it may be worth much more than the outstanding mortgage. Many banks and building societies offer loans secured on your house, and these are a useful source of finance if you can’t persuade your mortgage lender to increase your mortgage for major items like home improvements and school fees.

• The loans are generally fixed for a given number of years.

• The rate of interest is generally higher than the mortgage rate but lower than overdrafts and personal loans.

• The interest rate is variable.

• You risk losing your home if you offer it as security for a loan. Don’t take out this sort of loan unless you are confident you can pay it back.

Overdrafts

If you have a current account with a bank or building society you may be able to use it to borrow money in the form of an overdraft.

• Avoid going into overdraft (becoming overdrawn) without the permission of your branch manager: this is an unauthorised overdraft and rates of interest are high.

• Authorised overdrafts, agreed with the manager, can be a cheap and flexible way to borrow, but check the charges. You may have to pay charges on all transactions over a full charging period (usually three months) even if you are overdrawn for a short while only. The rate of interest is variable.

• Many banks and building societies allow customers to borrow up to a predetermined amount without having to ask permission. This may look like a good idea, and it can be convenient, but the rate of interest is often higher than with an account that has no automatic overdraft.

Bank ordinary loans

Bank ordinary loans are an alternative to bank personal loans (see below), but they are often cheaper because the banks ask for security. You may have to discuss the matter with the manager as ordinary loans are not promoted. Each one is tailor-made to suit your circumstances. There is no fixed monthly repayment, although you normally agree to repay the loan by a given date.

• Bank ordinary loans are normally cheaper than personal loans.

• The rate of interest is variable.

Personal loans

Banks and building societies provide personal loans which you pay off with repayments spread over a fixed term (normally between one and five years). Personal loans are suitable for larger purchases: cars, television, audio equipment or furniture.

• Personal loans are more expensive than an authorised bank or building society overdraft but are normally cheaper than borrowing from a shop or a finance company.

• The interest rate is fixed at the outset, so a personal loan can be a good deal if you borrow while interest rates are low.

Credit cards

If you pay off your credit card account in full at the end of each month you pay no interest on your purchases. But you can use your credit card to borrow money up to a predetermined limit. You must repay a minimum each month, but you can pay back more if you wish.

• If you are going to clear your account at the end of each month, choose a card with no fee.

• If you take the credit option, shop around for the lowest rate of interest. It may be worth paying a yearly fee in exchange for a lower interest rate.

• The interest rate is usually higher than with authorised overdrafts and personal loans, but you have convenience and flexibility.

• The interest rate is variable.

Hire purchase

With hire purchase, you don’t actually own what you are buying until the end of the so-called ‘hire’ period. You are required to pay a deposit, but otherwise the loan works in the same way as a bank or building society personal loan.

• Nowadays, hire purchase is normally only used for buying cars.

• Repayments are made over a fixed number of years and at a fixed rate of interest.

• The interest rate is usually higher than bank and building society personal loans, but there are occasional bargains.

• Buying a car on hire purchase or with a personal loan doesn’t prevent you bargaining over the price of the car.

Store cards

Store cards encourage you to spend money in your favourite shop. Some operate just like credit cards; others offer revolving credit, where you undertake to pay a certain amount to the store each month in exchange for a borrowing facility of 12-24 times your monthly payment.

• The interest on store credit cards is usually high.

• Only take a store card if you intend clearing the account at the end of the month or the store doesn’t take other credit cards.

• The interest rate is variable.

Shop credit

Many shops offer loans for larger items, arranged through finance companies. These operate like bank and building society personal loans.

• Shop credit is normally much more expensive than bank and building society loans.

• Check the annual percentage rate (see below) and compare it with other similar loans.

• The rate of interest is fixed at the outset.

• Treat offers of interest-free loans with suspicion — you may find the goods being offered are cheaper in other shops.

 

What to watch out for

APR: the Annual Percentage Rate of charge

• All loans and credit agreements must quote an APR. This figure, say 30 per cent, represents any interest you are paying on the loan plus charges and setting up fees. Don’t sign any credit agreement until you have compared the APR with similar loans.

• APR shows the true cost of borrowing, but don’t rely on the APR alone to tell you if it’s a good deal. Check the total cost of credit as well. This is the amount of interest you pay. For example, if you borrow for one year you pay less actual interest than if you borrow for two years.

• With loans where there is no fixed monthly payment, as with credit cards, the APR you are quoted may not reflect how you use your card. With credit cards, the APR is worked out using the minimum monthly repayment including any annual fee.

• Current account overdrafts are calculated in the same way as an APR, but any fee is left out, which makes an overdraft rate difficult to compare with other forms of borrowing.

If you are refused a loan

If you don’t know why you have been refused a loan, it could be the fault of a credit reference agency. Banks, building societies, stores and finance companies all consult the information data banks of such agencies before authorising a loan.

But they can get it wrong, and you have the right to ask for the name of the credit rating agency which was used, to see your file, and to correct any mistakes the agency has made. The Office of Fair Trading produces a leaflet which tells you how to correct a credit reference agency mistake.

17. July 2011 by admin
Categories: Finances, Loans | Tags: , , , , | Comments Off on How to Find the Cheapest Loan

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