How to choose a cheaper loan

Loans are getting harder to come by, as the credit crunch bites and banks become choosier about to whom they lend money. Bank of England figures for March show that the increase in net consumer credit slowed to £1.2 billion in March, from £2.3 billion in February. It is, therefore, even more important to do your research to find the best loan . Despite falling base rates many lenders have been increasing loan rates but you can still find a cheaper loan if you know where to look.

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At the same time as turning people away, lenders are adjusting the rates they charge to borrowers. Financial information group Moneyfacts says that half of all lenders offering personal loans have altered their rates since the beginning of the year. Moneyfacts analyst Michelle Slade said, "It's not only mortgage rates that continue to increase, so too have the rates and monthly repayments on personal loans."

Last week Nationwide increased its personal loan rates by a full 1%, even though the Bank of England's base rate fell just a couple of weeks earlier. Black Horse has increased rates for some smaller loans by an eyewatering 11.0%, while NatWest has upped rates on larger loans by 1.5%, adding £1,015.20 to the total cost of a £25,000 loan over five years.

Others to increase their rates in the last few weeks include Barclaycard, by 0.5%; Lombard Direct and AA by a full 1%; NatWest by up to 2.5% and Tesco Personal Finance by 0.6%. At the same time Barclaycard has withdrawn its Masterloan product, which once topped the best buy tables.

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However, while some providers had introduced double-digit increases, others have actually reduced the interest rate they charge. Michelle Slade said, "Thankfully its not all bad news, some lenders have in fact bucked the trend and reduced rates in the last few months.

"Moneyback Bank, Britannia Building Society, Yorkshire Bank and Clydesdale Bank have all reduced selected loans rates since the beginning of the year. In fact anyone looking to take out a £5,000 loan with Yorkshire Bank or Clydesdale Bank will have seen rates reduced by as much as 7%."

You might not think that being fussy about who you get your loan from makes a lot of difference, as long as you can afford the monthly payments - but look at it another way. If you borrowed £10,000 over five years it would cost you £196.56 a month with Moneyback Bank, £209.91a month with Egg and £216.65 a month with NatWest. An extra £10 or so a month might seem affordable, but when you add the extra that you will pay over the period of the loan, the cheapest deal saves you more than £1,200 compared with the most expensive one. Who would turn down a free gift of more than £1,000 simply for shopping around? You might be able to get some extras on that new car you have had your eye on.

Getting the right deal can really matter when you are looking for motor finance. According to research from Sainsbury's Bank, nearly a quarter of the total amount spent by car purchasers on a new vehicle comes from loans. Customers are used to haggling over the price of the vehicle, but they should be equally choosy about where they borrow - and finance available on the forecourt will rarely be the best option.

Steven Baillie, head of Sainsbury's Loans, said, "Our latest research reveals that the number of people looking to buy a brand new car has dropped by more than half a million on the previous six months. Clearly people are more concerned about their finances, and those looking to finance their purchase through a loan need to make sure they shop around to find the best deal for them."

So how do you go about choosing a personal loan?

Shop around

Don't just assume your bank - or, in the case of car finance, the dealer - will make the best offer. Your starting point should be Moneyextra's loans tools and calculators .

Make sure you do not apply for more than one loan at a time because, if you make several full-scale applications, they will show up on your credit record and could indicate multiple refusals, harming your record for the future.

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Annie Shaw
06 May 2008 © Moneyextra.com

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