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16 August, 2011

Amazingly some people get so excited about buying their beautiful new car or their life-changing new home extension or their fabulous holiday that they don’t want to know the detail of the personal loan they’re taking out to realise their dream. Phew, unbelievable isn’t it! No chance of you or me being that silly. Oh no, we know all about the proper checklist of things to consider. We know how to evaluate an unsecured loan with our eyes shut – well obviously not fully shut but only slightly open, squinting really, just enough to read the following (not that we need to)…

How much interest will you pay over the course of the loan? Look at the TAR (total amount repayable). Obviously, the lower the better, but other factors may mean that you don’t pick the absolute cheapest loan on offer. The TAR is the most important thing to consider when choosing a loan.

Is the interest rate fixed or variable? The majority of personal loans still offer fixed rates. It’s probably best to go for this option as then you can be certain about how much you will have to pay in future.

Are there early repayment penalties? Seven out of 10 borrowers repay their loans early, yet they sometimes have to pay a penalty for doing so. Lenders are allowed to charge up to two months’ interest as an early repayment penalty. If there’s a possibility you will repay your loan early, look for a loan that won’t sting you if you do.

See if you can make lump sum overpayments during the course of your loan. Unsurprisingly, flexibility costs money and you may end up paying a higher interest rate if you go for the flexible option, but if you think you may be able to repay early, then consider this option seriously.

Obviously you should take a close look at your monthly repayments – make sure that you can meet the monthly repayments. Be careful though. It’s tempting to reduce the monthly repayments by increasing the period of the loan, but you’ll end up paying a higher total interest bill as a result.

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