While interest rates are at an all time low, this might be the best time to take out a personal loan. The following tips will help you before you take out a loan, as there is more to consider than just a low interest rate.
Many banks and lenders are eager for business, despite restrictions placed on them since the fallout from the financial crisis. Those with good credit will be able to get competitive rates from multiple lenders and play them off against one another. The trick is to read the fine print very carefully when you are comparing loan offers.
It is NOT all about the interest rate
Before signing on the dotted line be sure to ask your lender what the total amount repayable (TAR) will be. This TAR figure will tell you exactly how much your loan will cost you over the course of the payback period. This figure will include interest charges and any fees that may be applicable. Find out if there are any repayment conditions. Some loans will allow you to take a payment holiday or freeze, and while this may sound good, you will still be charged interest during this rest period, so your total cost actually increases over the long run.
Early repayment charges
If you are able to repay the loan early you can save lots of money in interest charges, but beware because the lender wants your money. The fine print may contain a clause that pertains to early repayment and you may have to pay a fee or additional interest if you repay the loan early. This is a major warning sign. It can be worth your time to find a loan agreement that allows for a penalty free early repayment.
The bank will most likely offer you some sort of payment protection insurance equal to the value of your loan. What this means is that if you die or become sick the insurance will cover the payments for you. It sounds great and is often only a few additional bucks each month, but it is almost never worth it. You can purchase term insurance for a much higher amount and at a much cheaper rate from an independent insurance company. There are also restrictions on lenders insurance since they don’t medically underwrite the insurance at time of purchase – in other words, it is possible to pay the premiums and find out later that you don’t qualify. You should only take out lender insurance if you don’t qualify for regular insurance.
Check your credit rating
Know in advance if your credit rating is great, good, poor, or bad. Depending on this score you will either qualify for the best rates, or not. Often the best advertised rates are only available if you have a good credit history.
Consider the alternatives
A personal loan can be expensive. If you don’t need a large sum of money consider a credit card with a 0% introductory interest rate. This will allow you to spread the cost of the purchase over a period of time (sometimes up to 18 months) with no extra charges. Another option to consider is a line of credit versus a loan. With a line of credit you are only charged interest on the amount you actually spend, so if you don’t withdraw any money you will not be charged.