Traditionally if you wanted to take out a personal loan, there would be little choice involved. The only lenders willing or able to provide you with the loan would have been the high-street banks and building societies. Today, things are very different. There are many other lenders offering loans. Supermarkets, for example, are now very active in this market, as are online banks and even motoring organisations such as the AA and the RAC. The fact that there is such competition is good for the consumer but can also lead to confusion. Just what is the best way to evaluate lenders and their products?

Making a mistake in choosing your lender could prove to be a very expensive business in the long term. If you take out a large loan, it can easily cost you thousands of pounds more over the course of the loan than you would otherwise have paid.

To save yourself money and make the right choice when deciding on which loan provider to go with, here are the top five things to consider.

1. The annual percentage rate (APR) is the key to how much you will pay back on the loan. It is a good idea when shopping around to look at the lenders` headline rates and then approach the one offering the lowest APR. Be aware, however, that you may not qualify for the best rate and the lender might offer you a loan at a higher rate than advertised. Make sure as well that there are no other hidden fees or costs involved that would make overall payments higher than expected.

It is also worth checking whether the APR advertised is fixed rate or variable. Most personal loans are offered at a fixed rate but if your loan is tied to a variable rate you could be in for a nasty shock if interest rates go up. Another potential trap to be wary of is the discounted introductory rate. In this case you would be paying a lower rate for the first few months of the loan but then face a sudden steep rise in payments when the introductory period ends.

2. It is always a good idea to save yourself money and pay off loans early if you can. Many lenders, however, will make you pay hefty redemption penalties if you try to do so. This can drive up the overall cost of a loan significantly. To avoid this make sure you read the small print before committing yourself.

3. Many lenders offer insurance with their personal loans. These payment protection policies are a good option for some, but can be expensive and have often been mis-sold in the past. Before agreeing to take out such a policy, make sure that you are aware of all of the terms and conditions.

4. The option to take payment holidays on your loan can seem very attractive. Be aware, though, that this can often come at a price. You will often have to pay a higher APR if you do this. Also, the interest payable will be added to the total amount you have to pay back.

5. When choosing a personal loan provider, always make sure that it is one that you have heard of before. Do some research before making the loan application. Remember that once you have signed the loan agreement you are committed. Reputable companies will not charge you excessive interest rates or redemption penalties, while less reputable ones may well do so.

Having considered all of these factors, the best next step is to use an online loans calculator. You can then go ahead and apply for a loan with the assurance that you are not paying more that you should and that the loan is appropriate to your needs.

Thursday, September 15th, 2011 at 7:01 pm
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