The Costs Of A Personal Loan
By Michael Strauss
Like any financial agreement, a personal loan is not something to enter into lightly, and care needs to be taken to make sure you're getting a good deal that you won't regret for the rest of the term.
An obvious factor to consider when choosing a loan deal is how expensive the loan is. We all want the cheapest loan possible, but how exactly can we decide which is cheaper when comparing two loans?
APR
The most well known measure of the cost of a loan is APR, or the Annual Percentage Rate. This measurement is intended as a way of comparing loan offers on a like for like basis, and the lower the percentage figure, the cheaper the loan.
In theory, anyhow.
The problem is that there is no single standardised way of calculating APR, and financial analysts have shown that a loan with a low APR can in fact be more expensive in the long term than one with a slightly higher figure. Because of this, you need to look at all the costs associated with a loan, and not just the headline-grabbing low percentage figure.
Arrangement Fees
The first thing to look for is whether an arrangement or set up fee is charged. Obviously, if one is indeed present, then you want it to be as low as possible, and if you fold the fee into the loan amount you'll end up paying interest on it too, so if you need to pay an arrangement fee then if at all possible pay it upfront.
Length Of Term
The length of a loan term also has a strong influence on how much the loan actually costs. A loan which you pay off over a long term will probably cost you more in overall interest than one with a higher APR but a shorter term.
Early Repayment And Exit Fees
There may also be costs involved in repaying your loan before the due date, perhaps as part of a debt consolidation exercise. An early repayment fee may be charged, which will usually be a percentage of the outstanding balance, or you may find you need to pay an 'exit fee' to the lender if you clear the loan earlier than anticipated.
Payment Holidays
Finally, loans with a deferred start of repayments, or ones featuring payment holiday facilities, may seem like attractive offers. You should be aware, though, that even though you may be able to skip the odd payment here and there, full interest will continue to be charged on the balance in the meantime, which can have the same effect as raising the interest rate.
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