Borrowing money, when approached carefully, can be a useful way to get access to money you need but currently don’t have to hand. The downside, of course, is that you will pay interest and ultimately repay more than you borrow.
Naturally, when borrowing you will want to keep the interest as low as possible and generally minimise the amount you repay. Three simple steps can do a lot to help make your loan as cheap as possible.
Shopping around is arguably more important today than it has ever been. This is true of many products, and loans are among them. Countless providers in fierce competition introduce a vast array of deals, and the internet makes comparing those deals quicker and easier than ever. Don’t just head to one lender – even one you’ve been reliably told has reasonable rates – and accept what they offer you. Make sure to look at comparable loans elsewhere to locate the best rates. Make sure you understand the costs in full, though. Are there any charges besides interest, such as early repayment charges if you shift your debt early?
As well as checking out different providers, it is well worth checking out different types of finance. It is surprising how far some types of credit overlap and how different their charges could be. To take an extreme example, if you have a reasonably good credit score and only want to borrow a few hundred pounds for a short time, there is no point resorting to high-interest and risky payday loans (which are rarely if ever advisable) when you might be able to take out a credit card with 0% on purchases and a sufficient spending limit.
This one seems counterintuitive, and only works in quite specific circumstances, but it is definitely worth checking before you take out your loan. Loan providers usually offer better rates for bigger loans, and there are very distinct cut-off points between the different rates. If the amount you want to borrow is close to the threshold, then borrowing a little more could result in a lower rate that ultimately saves you money.
For instance, a good but attainable interest rate for a £2750 loan over five years at present would be around 15%. Boost your borrowing to £3000, and with a little luck and a fair credit history you could get under 8%. The latter will see you pay back under £3650, compared to just over £3925 with the former. In other words, borrowing £250 more will see you pay back nearly £300 less in total.
Once you have your loan, the best way to keep the interest down is simply to repay early. You should do this if at all possible, as the difference can be very significant (though beware of any early repayment penalties that could offset some of the benefits).
Pay above the minimum each month if you can in order to shift your debt early. Aside from some money “for a rainy day” it is better to put money towards your debt than into a savings account due to the disparity in interest rates, so while you may not like parting with extra money in the short term you will be better off once the loan has been cleared.