Personal Loans – do your research before signing up

This article discusses the importance of doing your research before signing up for a personal loan.

Personal Loans – do your research before signing up

The days when customers went to see their Bank Manager for a personal loan are long gone. Of course that is still an option, but with all the companies vying for your business then you are a lot more likely to go on the Internet and arrange a loan from the comfort of your home computer. However, signing up for a loan over the Internet brings its own dangers, as you are less likely to find out about the not so obvious costs related to taking out the loan.

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It's only recently that the Department of Trade and Industry changed its rules, demanding that loan providers give clear upfront information so potential borrowers can directly compare the costs of various loans.

The new rules stipulate that loan providers must clearly display the main elements of the proposed loan agreement, so the borrower is completely aware of the details before signing up, including:

The quickest way to access the cheapest interest rates is to search for the Best Buy tables, and see who has the lowest rate. But it's important to remember that if the interest rate is followed by the words APR Typical , it isn't necessarily the interest rate you'll be offered – the rate that they offer you will depend on the results of your credit check. The APR Typical only applies to two thirds of the lender's new customers. If you have any marks on your credit history, missed credit card payments for example, then you may well be one of the one third of people who is offered a higher interest rate.

We had a quick look and found thirty loans with interest rates below 7%. However only people with an unblemished credit history can reasonably expect to be able to get those rates. And as more and more people default on payments at some point, the amount of people who can qualify for these super low rates are decreasing. Those who don't qualify pay higher interest rates, sometimes far higher!

What most people don't realise is that while they are shopping around to get the cheapest loan, even making an application here and there, each time they fill out the application form a record of the application is added into their credit record. Big credit rating agencies such as Equifax hold onto this information, and pass it to lenders when requested. In the lending industry, a loan application, even if it is not pursued through to completion, is known as a ‘footprint' and every ‘footprint' reduces your credit rating. So the more loan applications you make, the more footprints and the worse your credit rating will get. Over time, you could find that cheap loans are not available to you, and your applications could be refused altogether.

It's a tricky situation – you need to find the cheapest loan, but you're penalised for filling out applications to get a cheap loan. If you feel that this could be a problem, then employ the services of a specialist loan broker. They'll use their experience and industry knowledge to calculate which lenders will offer you the best rates, taking into account your credit history.

You also need to be wary of lenders offering you Payment Protection Insurance (PPI) to protect your monthly repayments if you're off work due to accident, sickness or unemployment. Most lenders will do their best to convince you to take out PPI with them, but many will gloss over the full cost of the insurance and sometimes they won't give you all the information you need. ‘Exclusions' are the thing to watch out for, these are the circumstances that will make it impossible for you to claim. It is essential that you understand these exclusions before you sign up, because up to 50% ultimately have their PPI claim rejected, so it's best to avoid this if possible.

If you are eligible for PPI then you still need to be careful. These figures demonstrate a range of PPI quotes from a selection of lenders, based on a £3,000* loan taken over three years.

*The figures have been reached by calculating the cost of the loan with PPI, and the cost of the loan without PPI, and calculating the difference. Figures supplied by Moneysupermarket. All figures discussed in this article are correct as of 01.06

It's clear for all to see that the most expensive on the above list is almost one and a half times more expensive than the cheapest – maybe you'd expect Smile to be cheaper?

So is the Northern Rock quote, showing as the cheapest on this list, really a bargain? We decided to investigate.

Most of the UK's quality newspapers have a clear recommendation for PPI, and that's British Insurance Ltd. We asked them to quote for PPI to cover a monthly loan repayment of £92 - which is the typical monthly loan repayment quoted by the listed loan providers above on a £3,000 loan. British Insurance Ltd quoted £3.63 per month – that's £130.38 over the full three-year duration of the loan, and a full £97.86 less than Northern Rock.

So even Northern Rock, which was at first glance a real bargain, was charging way over the odds!

Our quick investigation has shown that it's really important to buy your PPI independently, and not from your lender! A quick internet search on Payment Protection Insurance and you could get be covered within minutes – but don't forget to read the small print and check out the exclusions first.

Readers please note : You should undertake your own background checks before taking any action on any aspect mentioned in this article. Where the author has mentioned specific product details or given examples of how companies have reacted to specific situations, these should be correct as far as the author is aware when this article was written. In some cases additional background information not mentioned in the article has been used in obtaining the examples. Some examples or quotes may have been taken from information available in the public domain where all the background details may not be available. Insurers do change policy conditions and underwriting approach. They will view each situation on its own merits.

You should be aware that details of the topics written about within the articles can change. Therefore, always check out the current position before taking any action. You should also check that any action you are considering, or any proposed purchase, is suitable for your personal circumstances.