Know what to look for when comparing loans
There is more to comparing loan products than simply finding the cheapest interest rate. Different loan products may have different terms and conditions, which may make two apparently similar looking products very different in reality. To make sure you are comparing loans like-for-like keep the following points in mind during your loan search, to ensure you find the best option for your budget and requirements.
APR
The APR, or Annual Percentage Rating, should be your first point of reference when comparing loans. You should aim to find the lowest APR that you can qualify for, as this will keep your loan as cheap as possible. However, there are many factors that will influence the rate that you will be offered. These factors will vary from lender to lender, which makes comparing different products from different lenders difficult based on APR alone. See our article on APR for more information regarding this.
Interest rate – fixed or variable
An important aspect of comparing loans like-for-like is checking whether the interest rates on the loans you are comparing are fixed or variable. The interest rate on loans with variable interest rates may rise or fall during the loan term if the lender adjusts their rates. This will make your budget more difficult to predict from month to month. On the other hand, the interest rate on a fixed interest product will remain stable for the duration of the term, which means you will always know what your repayments will be from month to month. As a result, two loans, one with variable rates and one with fixed rates, both being advertised at the headline rate of 5.7% APR can have a big difference in the overall loan cost, so be sure you are comparing like-for-like products.
Loan term
When comparing loan products, it is important to make sure you are comparing similar loan terms. The loan term is the duration of the loan, or the amount of time agreed between the lender and yourself during which you will repay the loan in full. The longer the loan term, the more interest you will repay overall, which will make the loan more expensive as a result.
Monthly repayments vs total loan cost
The most important thing to check when comparing loans is the total loan cost. That is the entire amount you will repay (the principal amount + interest = total loan cost). It may be tempting to look at the monthly repayments as an indication of the affordability of a loan, but that is true only if the loan term and the interest rates are both equal.
Flexibility
If flexibility is important to you, make sure you are comparing options that offer the features you require. Two common flexible features are payment holidays and the option to repay the loan early without penalty. Both of these things can make a big difference to the overall cost of a loan, and you might pay a slightly higher interest rate in return for increased flexibility. These features are usually listed in the terms and conditions, so make sure you check them when comparing your options – even if you don’t require them, because you may end up paying for something that you don’t need.
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