Even the Cheapest Loan Can Be Costly

In late February 2016, the Bank of England (BOE) announced that unsecured borrowing in January rose by 9.1%, which is the biggest annual increase in a decade. Economists were on fire with the announcement that UK consumers have “rediscovered their zeal for borrowing” on credit cards, overdrafts and loans. That borrowing swelled by £1.6 billion during the month, compared with an average of £1.3 billion over the previous six-month period.

One factor fueling the increase has been the widespread availability of cheap credit; interest rates have been at a record low over the last few years. There may, however, be a cloud around this silver lining. Though the BOE insists that the recovery and growth of the UK economy are not overly dependent upon consumer debt, some economists are still a little concerned that the country may be headed towards another crisis once interest rates rise again as they are bound to do. And on an individual basis, even a cheap loan can be costly if the borrower is not careful.

Research Your Options and Act Responsibly

When seeking a personal loan many people base their choice of lender solely on who offers the cheapest rates. Not surprisingly, people with excellent credit have more options, while those with a spottier credit record generally have to resort to higher-interest loans. But no matter what your credit score is, you shouldn’t take out a loan without careful consideration and research. First, if you’re taking out the loan to make a purchase you should be honest with yourself about whether you really need the item you’re thinking of purchasing. You should also explore alternative ways to obtain the item; will you be at any sort of disadvantage if you save until you can afford to pay cash?

Once you’ve decided you really do need the loan, it’s time to research and compare short term lenders. While interest rates are an important consideration, there are other factors related to overall customer experience that should also be considered, such as the loan terms available and the lender’s reputation for customer service.

It’s important to realise that the loan business is highly competitive and lenders, including banks, are constantly vying for your business. The bank that offers the cheapest loan in March might be underbid by another bank in April. That’s why it’s crucial to keep up with the latest figures.

Armed with the most current information on bank offerings, it might be an excellent time to consider refinancing your mortgage or consolidating your existing higher-rate loans and card balances with a single loan that can be made at today’s historically low interest rates.

What you absolutely don’t want to do is to take advantage of low interest rates and easily-obtained credit to finance a long-awaited shopping spree or pay for an exorbitant holiday, no matter how much you might feel you’ve earned it after almost a decade of austerity. Such a splurge might feel delightful for a little while, but once the reality, in the form of the monthly payments, sets in, that experience of delight could well turn into yet another cause of anxiety it was intended to alleviate.

But perhaps the most important point to keep in mind is that taking out a personal loan is not only a privilege but a responsibility as well. If you don’t handle the loan in a responsible manner – that is, pay it back on a timely basis according to the terms of the loan agreement – the loan will end up costing you much more than you ever intended, no matter how “cheap” it seemed in the beginning.

Know Your Rights as a Borrower

Finally, be a smart borrower by knowing your rights. It may seem that the lender holds all the cards, but as a consumer you do have rights. The debt charity Citizens Advice is one of many available resources that explains your rights as a borrower, in plain language rather than “legalese”. Just remember that being aware of your rights is not sufficient. You also need to remember that if you borrow from anyone but a certified lender, those rights may not apply. In short, know your rights and your lender.

A personal loan can be a very helpful tool, and handled responsibly it will enhance your credit. Just make sure you understand the real cost of the loan going in, and that your own actions don’t make it more costly than necessary.

Emu.co.uk is NOT a direct lender and our loan-matching service is free to use. We don't charge a fee, but there might be a charge from some lenders within our network. Emu is a trading style of Ready Money Capital Ltd. Emu.co.uk does not make lending or credit decisions, we are not a lender - as a broker we match customer's loan applications with lenders in our database depending on the information provided. Ready Money Capital Ltd is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register under reference number 802557. Licensed by the Information Commissioners Office (registration number ZA441875).

Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk. Emu is a broker, not a lender, and does not make credit decisions.