10 Tips for Taking out a Personal Loans

For instance, how to borrow £500 more than you wanted and save £829 over five years

The personal loans price war is hotting up. This week Derbyshire Building Society has thrown down the gauntlet to rival providers by launching a rate of 5.6 per cent on loans between £7,500 and £14,999.

According to analysts at price comparison site Moneysupermarket, this is the lowest headline rate since November 2006.

Although the Bank of England base rate has been at an all-time low of 0.5 per cent for three-and-a-half years now, loan rates have remained stubbornly high – until now.

With rates falling, we’ve put together 10 top tips for taking out a personal loan.

1. Shop around

As with any financial product, when it comes to taking out a personal loan it pays to shop around and compare APRs. The APR (annual percentage rate) tells the true cost of a loan taking into account the interest payable, any other charges, and when the payments fall due.

Your bank may say it offers preferential rates to its current account customers but you might still find there are cheaper loans available elsewhere. For example, existing Natwest customers are offered a rate of 7.9 per cent - 2.3 per cent above the rate offered by Derbyshire BS.

2. Check the small print

Before you apply for a loan, check the small print to see if you’re eligible. Some best buys come with some onerous conditions. Sainsbury’s Bank offers a loan rate of 5.6 per cent, for example, but applicants must have a Nectar Card and have used it at Sainsbury’s in the past six months. Natwest and RBS only offer their best loan rates to current account customers.

3. Think about early repayment charges

It might seem unlikely at the time when you take out a personal loan – but don’t forget that it’s possible you will be able to pay off your debt early. Many loan providers will apply a charge if you wish to do so, so it’s a good idea to check how much this might cost before you apply for a particular deal. If you think there is a good chance you will want to settle your loan early, it may be worth searching for a deal that comes without any early repayment charges.

4. Shop around for PPI

Payment protection insurance (PPI) has had some bad press but it’s still a useful product for some people. It’s designed to cover your monthly loan or credit card repayments if you are unable to meet them due to sickness or unemployment. If you decide you need this type of protection, it’s vital you shop around for the cheapest deal: buying a policy direct from your lender could still cost you far more than buying from a standalone provider. Furthermore, PPI policies often come with a long list of exclusions, so make sure you fully understand what is, and is not, covered before committing to a policy.

5. Check your credit rating

If you plan to apply for a market leading personal loan, it’s crucial that you check your credit rating first. Lenders are only required to offer their advertised 'typical' APRs to two-thirds of applicants. Therefore, if your credit rating is not in good shape, you may be offered a more expensive deal than the low rate loan you originally applied for.

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