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19/08/05

Ten important rules to consider when taking out a personal loan

If you're looking to take out a personal loan, follow a few basic rules to ensure you don't miss out on the best deals:

1. An unsecured personal loan isn't secured against your home, so its unlikely you will lose your house if you can't keep up your loan repayments.

2. The more you borrow, the more interest you will be charged, so you should only borrow the minimum you need in order to keep the interest charges down. In addition, the longer the repayment period, the larger your interest bill, so try to keep the term of your loan as short as possible, while keeping your monthly repayments affordable.

3. The majority of personal loans have fixed rates of interest, which means that your monthly repayments will be the same throughout the life of your loan.

4. APRs (Annual Percentage Rates) can be misleading and are not be best measure of the cost of borrowing. They should only be used as a rough guide as lenders have developed techniques to artificially reduce the advertised APRs, so they appear to be more attractive than they actually are.

5. In addition 'typical' APRs should be taken with a pinch of salt. By law only two-thirds of borrowers (67%) must be offered the advertised typical rate, so you may end up with a higher rate than advertised due to your credit history being less than squeaky clean, or it might be you don't match a lender's ideal customer profile.

6. It is essential to shop around as interest charges vary considerably from lender to lender. If you're looking to borrow £5,000 over three years, with some lenders your interest charge could be less than £500 with others it could be as much as £2,500.

7. The best way to compare personal loans is to look at the 'Total Amount Repayable' (TAR). This figure is what you'll have to repay in total and includes all monthly repayments, fees and interest charges. Therefore, the lower the TAR, the better the deal.

8. High street banks tend to offer the least competitive deals. If you want to pay as much interest as possible, go to your bank - if you want to pay the least, look at the Best Buy tables and compare loans online.

9. You should avoid paying payment protection insurance (PPI) or payment loan protection (PLP) as it is over priced and offers poor value for money. PPI or PLP is protection which will pay off your loan if you die, or pay the monthly repayments if you are unable to work due to accident, sickness or unemployment. Typically PPI will increase your monthly repayments by between 15% and 25%. The cost of PPI can be several times the total interest bill. The cost of the PPI isn't included in the interest rate and lenders often deliberately lower the interest rate (APR) and increase the insurance cost. In addition policies tend to be riddled with small print and exclusions. It is optional and should really be avoided unless you feel that you need the peace of mind that PPI provides, if so choose a loan that doesn't charge the an extortionate rate for this protection. The better alternative is to put some money aside each money in a savings account as back up should you have problems. If you repay the loan without any problems you would have built up some additional savings that would otherwise have gone to the lender.

10. Look out for loans with charge early settlement penalties. Statistics show that around seven in ten personal loans (70%) are paid off early. Some lenders charge no early repayment penalties, but the law allows lenders to charge up to two months' extra interest if you pay off your loan early.

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