Unless you’ve taken out a personal loan before, you may find the whole process a bit baffling. There are many things you need to know about the process of taking out a loan, as well as quite a few traps and pitfalls you need to avoid.
Here are the main mistakes you need to avoid making…
Loan pitfall #1: Repaying your loan early and incurring an early repayment charge
It’s generally a good idea to pay back your loan before it’s all due, but it isn’t if your personal loan provider charges an early repayment fee that is higher than the interest remaining on the loan. These charges can be really expensive, and can even be more than the money you’d save on interest payments by repaying the loan early. Check your loan carefully. I know some loans are set up so that regardless of whether it is paid out early or not, the whole interest amount for the full term of the loan is payable anyway.
Avoid this pitfall by: checking the terms of your loan agreement for details of early repayment charges. If your bank charges an early exit fee and it is more than the monthly fees or charges for the remaining time on the loan you could consider paying it all out but not ending the loan. This means you will still be charged a monthly fee, but you avoid the early termination fee and pay less interest. Check how your loan is set up and compare the costs.
Loan pitfall #2: Incurring unnecessary charges such as ‘same day’ funds
Some loan providers promise to give you the money the very same day you apply, but charge a fee for doing so. Unless you need the money within hours, this is an unnecessary expense.
Avoid this pitfall by: saying no to ‘same day’ funds and waiting for your loan to come through. Loans are usually processed quickly and you can save yourself a lot by avoiding this charge because this charge is often applied to the loan so you end up paying interest on it too!
Loan pitfall #3: Looking solely at the APR when taking out a loan
The Annual Percentage Rate (APR) of a loan is the percentage of interest you pay on your loan each year, whereas the Total Amount Repayable (TAR) is the total amount you’ll repay including all fees and charges.
Avoid this pitfall by: Looking at the TAR to work out the total cost of a loan. Loans are set up differently with establishment fees, monthly fees, redraw fees, same day fund fees, early exit fees and more. Check all the fees and know exactly what the whole loan will cost you to avoid paying more than you need to. The interest rate isn’t the only cost.
Other mistakes to avoid include:
· Taking payment breaks, which make loans more expensive. Just because it is offered, unless you really have to, don’t take a break. The loan is not paused, the interest still accrues and you then have to play catch up.
· Borrowing a larger amount than you need. Just because you can get enough to buy a mansion or a BMW, doesn’t mean you need to borrow that much. Stick to what you need and learn to save instead of using loans.
· Agreeing to add PPI or anything else to the loan when you don’t need it
· Paying late – this can cost you a lot! Not just in extra interest but some late payment fees are very high.
What it all comes down to is research and self discipline!
This is a sponsored post from Halifax.