Personal Loans and Debt

Run through the events of the day and chances are a high street bank, an online bank or your local supermarket solicited you, over the phone or email, for a personal loan. The easy availability of money has prompted countless lenders to bombard consumers with loans that have a mind-boggling choice of fixed or variable annual percentage rates (APR), early repayment fees, payment schedules and other charges. This is a far cry from the past when loans were hard to come by. Over the last decade alone, consumer debt in the UK has grown to £1 trillion.

Who offers these loans today? Banks, building societies, online financial providers and supermarkets promote their loans heavily and vie for your attention. All claim to provide great value at the lowest rates possible. High street banks and building societies have physical branches, offer personal attention and invariably charge higher interest rates for the loan. Online financial providers have fewer overheads and hence charge less. Consumers get a better deal if they agree to pay instalments through direct debit and receive statements by email rather than through post.

Given the range of options on offer, how does one select a loan with the best value for money? The key to the cost of any loan is APR, which determines the interest one needs to pay on the amount borrowed. Some online loan sites offer loans at 6% APR while others lend at 30%. APRs are quoted as fixed or variable rates. In the former, rates are static throughout the term of the loan; while in the latter, rates rise or fall in line with base rate changes through the term.

Apart from the headline interest rates, there are other charges (some may not be immediately visible) that need to be factored in while comparing loan offerings from different providers. Lenders may offer monthly repayments or lump-sum payments. For early repayment of loans, penalties may be charged as a flat fee or a percentage of the loan. In all cases, it is recommended that one read the fine print.