It can be easy to find loans with competitive interest rates, but does that make them cheaper? Personal Loans Now reveals the hidden costs of a loan beyond the interest rates quoted.
- Cutting costs for personal finance
- Using loans calculators
- Looking at the Annual Percentage Rate and Total Amount Repayable
- Comparing costs for personal finance loans using an online calculator
- Add-ons for personal loans
Interest Rates and Other Loan Costs
Getting the best personal loan rates is just one of the top priorities for all applicants. However, a more important factor when borrowing money is to understand exactly how much it is going to cost when you pay it all back.
Lenders will flagrantly boast that they are offering the lowest APR on the market and tempt new customers by quoting monthly repayment amounts. However, when you actually calculate the total cost of borrowing it can come as quite a shock.
Oveview of Unsecured Personal Loans
Unsecured loans will usually be for any amount from £1,000 up to £25,000 although some banks are now offering to lend applicants who are considered to be a good risk as much as £50,000. However, for the most part, an amount over £25,000 will require some collateral and will be agreed as a secured loan.
Borrowing on an unsecured loan is an attractive option. It is especially so if you don’t want to wait to build your new home extension or install a new kitchen and bathroom. Anyone who has tried to buy a new vehicle using car finance will know how expensive this option can be. Many people now use a loan for this purpose.
However, have you ever sat down and worked out what the total cost of borrowing might be?
Can You Really Afford to Borrow?
A typical personal loan interest rate is very low and has been since the financial crisis hit the UK in 2007. It is not just the headline interest rate that matters when you are thinking about borrowing a large sum of money. Even if you are offered the representative APR that is headlining in the adverts, the overall cost of borrowing may come as a big surprise.
Being able to make the monthly repayments for a loan might make you think that borrowing a large sum is easily affordable and often it is. However, circumstances may change. Borrowing a large amount of money without considering the impact of the interest charged could make you end up with a huge amount of debt that will make life difficult.
Personal Loan Insurance and Fees
A lender will often recommend that you take out insurance against losing your job or being off work due to sickness. A financial product of this type is called Payment Protection Insurance. The monthly premiums for the insurance can considerably add to the cost of a personal loan.
Additionally, many borrowers are unaware that loans can attract an arrangement or set up fee. This can also add considerably to the total cost of a loan. When you factor in penalties for repaying a loan early, you can see that the extras associated with borrowing may add up to a staggering amount. So, how do you calculate the total cost of a personal loan? The simplest way is to work the sum out using an online personal loan
Working Out The Total Cost Of A Personal Loan
Trying to estimate the total cost of personal finance in your head will probably prove impossible. That is unless you are a wizard at maths. Even using a hand held calculator is a difficult prospect and will only give you a rough estimate.
So, the best and easiest option, when you wish to know about the total cost of a personal loan, is to use one of the many online loan calculators.
Personal Loans Interest Rate Calculator
A loans calculator is a tool that can be found on most money advice websites. The calculator may also work out the eligibility of an applicant. However, in this case, more details are needed. Details such as; personal information about employment and residency as well as income and outgoings are required.
To work out the total cost of a loan, you just fill in the fields using the amount you want to borrow, the interest rates and the term of the loan. The calculator will come up with the total amount that will need to be repaid over the duration of the loan. Make sure that you have all the relevant factors before you start the calculation. It will enable the calculator to come up with the accurate figure.
Comparing The Cost Of Loans Using A Loan Calculator
One of the simplest ways to save money on borrowing is to use a loan calculator. Use it to compare the cost of a current loan with that of a new one. Assuming that you would qualify for the lowest APR and can borrow the required amount, you can check the costs for both an old loan and a new one. If the new loan is cheaper, it makes sense to borrow money to pay off the earlier loan. You can then repay your debt using the lower cost loan.
What Information Do I Need To Calculate The Cost Of A Personal Loan?
To use an online personal loan calculator, you will need:
- the amount you wish to borrow
- how long you want the loan for (the term)
- the APR
Using just these few simple facts will give you the total monthly repayment figure, the total interest charged and the total amount you will need to repay.
What To Consider Before You Go Ahead With A Personal Loan
How Much Should I Borrow?
It’s tempting to borrow a larger sum and you may be attracted by the lower interest rates or a longer term of repayment. However, always remember that the lender is in this business to make as much money as possible. So, it is wise to keep your borrowing requirements to the minimum and over the shortest possible period. Long term loans are attractive but are also substantially more expensive, even if the interest rate offered os lower. Make sure to opt for fixed interest rates loan. You will not be subject to fluctuations in the bank base rate. A fixed-rate loan makes it easier to budget for the monthly repayments.
Annual Percentage Rate Or Total Amount Repayable?
APR is an excellent way of comparing offers from lenders. However, you should always find out the total amount repayable as well. An APR must include setup fees and any insurance attached to the loan. Calculating the total cost of a loan from each lender will also give you an accurate and more complete picture of the best deal.
Terms And Conditions Of Personal Loans
Studying the terms and conditions of a personal financeloan offer is also very important.
Imagine a situation where you suddenly come into some money and want to pay off your debt. You then find that there are some costly conditions attached. For example; a penalty if you repay the full amount before the end of the term. Adding this factor into the total cost of a personal loan is just as important as the APR, insurance and arrangement fees.
Will You Get Full Value From A Personal Loan?
Applying for a loan to pay for a large project like home improvements or buying a new car may be a sensible option especially if you have no savings and need to make the changes immediately.
However, there are often alternatives that will reduce the total cost of borrowing. It is not wise to use a credit card for large purchases. If you only need the money for short space of time, e.g. while waiting to withdraw money from a 30-day notice savings account, then using a 0% credit card could be an option. Just be careful about being sucked into debt by offers that are too good to be true.
One final thing to consider before taking out a personal loan. Always check for any add-ons. These extra costs may come in the form of severe penalties for missed payments, collection fees or insurance that have been included without your knowledge.
Finding A Reputable Lender
Finding a reputable and flexible lender is the key to safe borrowing, one that is FCA approved. Although you may trust your own bank, when it comes to borrowing they are unlikely to offer you a better deal than they offer to new customers. Wonder why this is so?
Banks are keen to sell personal finance loans, and these are just saleable products like any other. Selling loans makes the banks good profits. All banks are concerned about increasing their sales figures by signing up new borrowers. This is why your own bank may not offer you their best rate of interest. You are already a customer. So, it is always worthwhile to shop around as long as you make sure that your chosen lender is fully regulated. Also, do not be seduced by offers like free holidays or cash back. Inevitably personal loans with these freebies will almost certainly have some conditions attached. For example, losing the cashback if you repay too early.
Payment Holidays – A Good Idea?
Another feature to avoid is the ‘payment holiday’. While you may appreciate a short break before you start repaying the loan, it is going to cost you more money in the long run. Payment holidays are always an expensive option as the extra interest rates soon builds up on the balance of the loan. This means you will pay interest on top of the interest added at the start of the loan. As you can see calculating the total cost of a loan includes many different factors. A little research will allow you to work out whether the cost is worth it.
Interest Rates Don’t Tell the Whole Story
In this section of the guide Personal Loans Now discusses the impact of interest rates on personal loans. We also discussed the ways to cut costs on these loans and the ways to work out the total costs of a personal loan specifically using online loans calculators and comparing costs. Furthermore, add-ons are often sold with a personal finance loan. We also saw how there can be fees for early repayments which could leave you in a worse position than if you pay later. It is important to get a good value personal loan from a reputable lender. Personal Loans Now also provided a list of what to avoid when taking out a personal loan.