When comparing loans, it is very important to consider at least the following factors:
The interest rate and APRC: The interest rate of your loan is a percentage of the total amount you’ll be borrowing and can vary significantly, depending on the provider and your credit score. Those with a better credit score can expect lower rates of interest, but those with a poor credit score can expect to pay significantly more. The APRC (Annual Percentage Rate of Charge) of a loan will also help you to understand the total cost repayable on the amount you wish to borrow. The APRC rate of a loan includes both the interest rate and the compulsory charges payable with it, such as the arrangement fee. The lower the APRC rate of a loan the better, however it’s important to remember that APRC rates advertised may only be representative and can differ to the final rate offered to you.
As above, it’s also important to remember that secured loans may have variable interest rates which may change during your term. It’s important to establish interest rates before you apply for a loan to make sure you able to afford your repayments. Interest rates in the UK have recently risen which will have a marked impact on the amount of interest you will pay. Financial forecasting suggests that interest rates may rise as high as 1.25% in 2022, but could go even higher by the end of the year [1].
It’s important to remember that a rise in interest rates may also impact on your other costs. If your main mortgage is on a tracker or variable rate, it’s likely that these payments will go up, reducing the amount of money you may have left over to make repayments on your secured loan. Cost of living increases in fuel, food, and energy, may also mean you are able to afford less. Fuel prices for example rose 12.6p per litre in the UK between February and March 2022 [2].
Fees: Some secured loans have set up fees and costs attached to them which you’ll need to figure into your calculations to compare loan payments. Compulsory fees will be covered by the loan’s APRC rate information but there may also be penalties for late payments or administration charges (and some of these may not be obvious).
Your credit score: Your credit score will also influence how much lenders will be able to give you. Prior to applying for a loan it can be a good idea to check your credit score and take some time to work on it if it is not very good. Having a better credit score gives you more choice over the loans you can apply for, which means you can pick more favourable interest rates and terms.
The repayment terms of the loan: As above, there may be a fee if you pay back the entirety of your loan before the loan period has completed. It’s important to consider this before making the decision to pay back the loan in full; it may be better to set the money aside to continue making scheduled payments.
The duration of the loan: Secured loans usually have a longer term than other types of loans. This means you’ll have longer to pay off your debt, reducing the amount per month you’ll need to pay back, but increasing the overall amount of interest you’ll pay. It’s generally best to try and have the shortest loan term possible as this means you’ll be paying back less interest overall. However, it’s important to make sure that this will not stretch you financially. Remember that your financial situation could change over the term of your loan (for better or worse!).
The affordability of your payments: When researching loan rates, you must make sure that you will be able to afford your repayments, even if something unexpected happens (such as the car breaking down or the dog needing an operation). Make a list of your expenses and work out how much income you can comfortably put aside to make repayments, remembering to account for rises in expenses as well as any money going into savings.