Personal loans can be a great tool to help you out of a sticky financial situation or to help finance a large purchase. But it’s important to compare lenders to find the right deal for you. A loan with no fees attached is obviously appealing, but it's normally smartest to simply look for the loan that will cost you the least overall. Here's what you need to know.
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When you borrow money, you’ll generally need to pay it back with interest. Although you might not think of it as a fee, the interest rate is usually how lenders cover their costs and make a profit.
In the world of personal loans, the key figure that lenders use to promote their products is the “annual percentage rate” (APR). The APR is designed to provide an annual summary of the interest you’ll pay, plus any mandatory fees, and must be calculated by all lenders in the same way. This makes it a handy benchmark for consumers looking to compare loans.
Aside from the interest, the main fees (that won’t be included with no-fee loans but may feature on other personal loans) are:
If you’re considering a secured loan (that’s where you put up your house as collateral in order to borrow more or to get a better rate), then you’ll normally incur a broker fee too.
If you’re comparing any credit-based products, it won’t be long before you’ll come across the Annual Percentage Rate (APR). This figure is designed to provide an annual summary of the cost of a loan. It takes into account both interest and any mandatory charges to be paid (for example an arrangement fee) over the duration of a loan.
All lenders must calculate the APR of their products in the same way, and must tell you the APR before you sign an agreement, so for consumers it can be a handy tool for comparison.
Bear in mind, however, that lenders are only obliged to award this rate to 51% of those who take out the loan – the other 49% could pay more. That’s why it’s often referred to as the representative APR.
Personal loans without fees won’t come with a set-up fee. This means the interest rate and the APR will be the same.
However, nearly all of these products still do charge late payment fees. It’s never a good idea to accept a loan where you’re not confident about making the repayments on time. Some will also continue to charge interest on early repayments up to two months beyond the date on which the amounts were paid.
What’s more, lenders tend to up the interest rate on their “no fee” products to make up for the shortfall from not charging a set-up fee. In this case, it could be argued that the administration costs are simply spread over the term of a loan, rather than charged as a one-off fee.
Here’s a scenario that a typical borrower may face.
Samantha wants to borrow £5,000 over two years.
Although Lender A is advertising a lower interest rate, the total amount payable is higher than Lender B’s deal once the set-up fee is considered. The easiest way to avoid being misled when comparing deals like this is to compare the “total amount payable” or APR of the two deals. These will both take interest and fees into account.
As well as comparing the “total amount payable” and APR, have a look at the minimum eligibility criteria. It’s no use applying for the product if you don’t meet the criteria.
Consider the late repayment charges, too. These tend to be punitive, plus there will be added interest – and damage to your credit score. It’s unwise to accept any loan unless you’re certain you can meet the repayments.
Common requirements often listed among lenders’ minimum eligibility criteria include:
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