Finding the Right Personal Loan

Unsecured consumer loans dropped by 38.7% in the first three months of last year, the most significant fall since 2007, according to new figures from the Bank of England.

Banks and building societies reduced their lending to consumers during the first three months of 2018 at the quickest rate since the credit crunch, according to the bank’s figures.

Banks and building societies were hesitant to lend borrowers money due to the enormous rises in UK consumer debt. For many households, this meant they were unable to obtain credit from banks and building societies as they would be able to pre-2007.

The remaining option for borrowers was those lenders with less stringent criteria for borrowing – namely payday loan companies. Sadly, the representative APR on these loans typically forced more borrowers into unmanageable debt, using unscrupulous tactics to obtain repayment yet further compounded the misery of those borrowing. One such well-known company was Wonga.

However, newer, tougher legislation from the FCA, increased customer complaints and compensation claims made against Wonga for business malpractices led to the company entering administration in August 2018, sending shockwaves in the payday loan industry.

The good news for consumers was that they received further protection from such lenders, the bad news was – how do they obtain credit today?

To avoid borrowers taking out personal loans with exorbitant interest rate payday loan companies, they should try these tactics first with high street banks and building societies first.

1# Shop around

As with any financial product, when applying for a personal loan, its wise advice to shop around and compare APRs (annual percentage rates). The APR provides an indicator of the actual cost of a personal loan considering the interest payable and other charges and fees.

Young woman using a laptop

Banks tend to offer preferential rates (i.e. lower APRs) to their current account customers, yet potential borrowers may find cheaper alternatives by looking around at comparison websites.

2# Check the terms

Before borrowers apply for a loan, absolutely check the small print to see if they’re eligible. Some best loan APRs come with some unusual conditions. For example, Sainsbury’s Bank offers a loan rate from as little as 2.8% in some cases; however, this is only for those who are a Nectar Cardholder and who have used it within the last six months.

3# Check your current credit score

Should borrowers plan to apply for a market leading personal loan, it’s crucial that they examine their credit score rating first. Lenders only offer their advertised ‘typical’ APRs to 51% of loan applicants. (This is known as representative APR, and is perfectly legal).

Accounting for a credit report

Thus, if a borrower’s credit rating is not high enough for a lender to deem the borrower is a low-risk, then they will be offered a more expensive APR than they originally applied for.

Noddle is a free credit report checker.

4# Don’t apply for too many loans at once

When borrowers apply for a loan online, they will leave a ‘credit footprint’ that lenders check before approving a loan. Borrowers who apply for many loans simultaneously will look desperate to a lender and or assume to be in financial difficulty. Lenders then are less likely to offer borrowers credit as they will appear as more of a credit risk, even if a borrower meets the lending criteria.

However, there is one solution to avoid leaving a footprint behind, and that is to check comparison websites that permit people to receive a personalised quote without damaging their credit rating. This is known as a ‘soft search’ and does not leave a footprint, compared to a typical ‘hard search.’

So apply through these websites and banks first, if you get some no’s then at least you have not damaged your credit report for trying.

5# Borrow a little more than you need

Generally, the larger the loan, the lower the interest rate. Some lenders price their loans in a way that the next tier up in the borrowing amount is a dramatically lower APR.

For example, borrowing a £2,500 loan from the AA will cost borrowers a 17.9% APR over three years. Borrow £500 more (£3,000), and the rate drops to 9.9% APR.

A calculator and money

Obviously never borrow what you cannot afford to pay back, yet with more acquired the interest rate drops and, if borrowers can manage the repayment amounts each month, they will save in the long-term.

Some personal loan providers allow early repayment options, so should the applicant be approved, they could pay back the excess they don’t need and thus ‘repay’ the loan back sooner.

With traditional banks and building societies cautious about lending to individuals and households who are maybe unable to repay a personal loan, borrowers must become savvy if they are to obtain the best loan APR’s (and in the process not rely on a payday loan to cover their needs).

Applying for a personal loan should never be a quick decision, and despite its ease, try to avoid taking a high-interest payday loan until you try these tactics first. They could save borrowers hundreds of pounds in the long-term and risk of severe financial debt.

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