Wednesday, April 16, 2008

Choosing The Right Loan

Sadly loans come with more tricks; even worse, some of the lowest interest rate loans can be the most costly due to nasty hidden costs. Yet before you pick the type of loan it’s crucial to decide one thing.

How much, for how long?
The formula’s simple; borrow as little as possible, repaying as quickly as possible. To avoid complications, always base borrowing on what you can comfortably afford to repay (preferably after Doing A Budget), as over-borrowing can cause debts to spiral out of control.
Beware, while borrowing over a longer period spreads the debts and decreases monthly repayments, it massively increases the interest you'll repay. Borrow £10,000 at 7% over three years and the interest cost is £1,100; borrow the same over 10 years and it's £3,900.

Q.1 How's your credit history ?
Not good? …. Be careful with cheap loan applicationsIf your credit rating is less than top notch, applying for a cheap loan could do more damage than good. Most ultra cheap loans are typical rates; meaning only two-thirds of successful applicants will get it. All the others will either be rejected or offered the loan at MUCH higher interest rate. Worse still, the fact you’ve applied will be recorded on your credit file, and has a slight negative impact; meaning you need to pick what applications carefully.

Good to very good? …. Answer the next question

Q.2 Will you want to repay the loan more quickly?
Quite likely to repay early?... Personal Loan rates are fixed.
Personal loans are designed to be paid off over a fixed time; they rarely allow you to increase the monthly repayments, and try and repay early and you’ll often be stung with a penalty of up to two months interest to do it. If it’s not stretching your finances too far, shorten your repayment term to avoid this dilemma. If that isn’t possible, and substantial early repayment is likely, a flexible loan is the best option. While these have higher interest rates, as you’re likely to repay more quickly that should more than offset the cost.

Unlikely to repay early? .... Answer the next question

Q.3 Are you considering Payment Protection Insurance (PPI)
Before you answer…. Warning! PPI is the biggest loan scam around!
Many people have had these policies, which cost £1,000s, added to their loans without being told; sold it through fear-based sales tactics, or are told it’s compulsory, which it isn’t (if that’s happened to you, then read the PPI Reclaiming guide.) Payment Protection Insurance is supposed to cover you in the event of accident, sickness or unemployment. Sadly, while a useful concept, most loan insurance policies cost four times more than they should, are riddled with exclusions, and are sold to people who they don’t cover. Never simply agree to get it from your lender because it “sounds sensible” you can get it for a fraction of the cost elsewhere.

It’s a sensible precaution for us.
Most PPI policies only pay out for a year, so if you have no other funds, wouldn’t be covered by work-based benefits, and don’t have any other insurance policies that would cover your repayments for a year; then getting a policy may be a sensible move for you

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