If you start searching for a loan, you will see that they differ in many ways including price. It can be tempting to think that those with the lowest interest rates will be the cheapest and if you use a comparison site that compares on interest rates, this will lead you to the same conclusion. However, this may not be the case as just comparing a percentage does not give you the full story about the loan. While a comparison site can be useful, because it will let you know who has a good rate and who is offering loans, you may not get the cheapest by looking at these. Therefore you need to look beyond this and think about every aspect of the cost of the loan.
The interest rates will show what percentage of the money borrowed is charged in interest. The interest rate might be fixed for the term of the loan or it may be variable and therefore can be changed. Rates tend to change if the base rate is changed, although they will often not go down very quickly after the base rate reduces but may go up quickly if it goes up or even be put up even if rates do not change. Therefore you need to decide whether you would rather have a fixed rate where you know exactly what you will be repaying each month or a variable one where rates might go down but could also go up.
The length of the loan is also very relevant when comparing the cosy of them. If the interest rate is low but you repay over a year it could be dearer than a loan with a higher rate that is repaid over six months. It is therefore important to calculate how much the loan will actually cost you, rather than just comparing the interest rates.
Fees and charges
Loans may have additional fees and charges as well as the interest rate. For example, some may have an administration charge for setting up the loan or something like that. It is really important to find out what these costs are so that you can compare the different loans properly. You may find, for example, that one with a lower interest rate has a higher setup fee and vice versa. If you cannot see what these fees are, when looking at leaflets or on the website, then contact the lender to check. Some may not have fees but some will and so you need to be sure of whether the loans that you are considering do have fees and how much they are.
This means that it is really important to make sure that you are looking at the total costs of the loan. It is best to actually calculate the total amount that you will pay back. Work out how much this will be by looking at the interest rate and the length of the loan and also add in any extra charges or fees. If you find it difficult to work this out then you should be able to contact the lender and ask them to work it out for you and give you the cost. Once you have this figure for a selection of different loans you will be able to compare them and work out which will be the cheapest for you to take out.
Late payment fees
It is also worth checking out any other charges they may have, such as late payment fees. These occur when you miss a repayment for any reason and they can be high. You may be charged a one off fee and you may also be charged interest at a higher rate until you make the payment. It will depend on the type of loan and how it is set up. It is good to find out how the loan that you have is set up, so that you can be sure that you are aware of what will happen if you miss a repayment. You may feel that this will not happen to you and that you will always be able to repay your loan. However, you never know what might happen in the future and the longer the length of the loan, the more chance there is that you will not be able to repay it in the future. It is just worth checking out the rates and thinking about the consequences of not making a payment so that you are aware. It will also allow you to compare the different loans and if they are similar apart from these fees, it will be easier to choose which one is the best for you.
So although we seem to be encouraged to compare loans using their interest rates, it is wise to make sure that you also compare their hidden costs. The admin fees can be really high with some loans and make a significant cost difference to them. With some late repayment fees can be very high and could cause a loan to be significantly costlier than an alternative one. The length of time that you have the loan for is also relevant as the longer you have it for, the more interest you have to pay. Therefore you need to calculate the total costs of the loan for the whole time that you will have it and compare that with other loans so that you can get an idea of what it will cost you in total. This can be time consuming and complex and this is why it can be a better option to use a financial advisor. They may cost you quite a lot of money but they could end up saving you a significant amount which could be worth a lot more than the money that you pay out for them. It can therefore be worth considering this option of it is something that you can afford.