When you are choosing a loan then it is best to use a number
of criteria to decide which one to take out. It can be tempting just to compare
interest rates as that is what comparison websites do, however, you may want to
look beyond these.
It is worth noting that often the interest rate of the loan does not tell the full story with regards to cost. There may be other costs as well. There may be a charge for setting up the loan or other sorts of admin fees. These could add up and make a significant difference to the overall cost of the loan and so it is wise to make sure that you are aware of them. If you compare the AER rather than the interest rate then this includes these costs and therefore should be a better way of doing things. These may still not be the only costs though. You need to consider that there will be charges if you make a late repayment or miss a payment or things like this. It is likely that you will hope that you will not do this of course. However, it is worth just being aware of how much these charges will be so that you can compare the different loans. If they have a similar AER but their late payment charges differ a lot, then this could be a good reason for you opting for one rather than the other. Also knowing how much those charges are should help to give you a good incentive for making sure that you pay on time.
Ease of repayment
Understanding how much you will have to repay and how often is really important as well. You need to make sure that you will be able to afford this for the whole time that you need to pay it. You should be aware of how much you will be charged if you do miss a payment and hopefully this will enable you to understand that it is important that you should ensure you can make the payment on time and in full. Once you know how much you will be expected to pay, it is a good idea to look and see whether you think that you will be able to afford this. Look at your previous bank statements to see whether you normally have this amount of money available to you. If you do not then you will need to think about what you will be able to do so that you will be able to afford it. It could be that you will be able to reduce your spending in some areas, where you buy items that are not necessary or that you will shop in cheaper places so that you can buy the same things but spend less. Obviously how much change you need to make to your normal spending will depend on how difficult it might be for you to afford the repayments. It is always good to have a plan even if you can afford the repayments as the cost may go up if you have a variable interest rate and the rates increase. If you have picked a loan because it has low interest, it does not mean that it will not rise in line with increases in the base rate unless it has been fixed. Therefore, you will need to think about how you would manage should this happen.
There may be other factors as well as financial ones that you may want to consider when you are choosing a lender. Some people, for example, want a lender that has a local branch so that they can speak to someone about the loan. Some people want to make sure that the customer service department is really good so that they can get hep if they want it. Some people want to use a lender they have heard of and others have concerns about reputation.
It is therefore worth thinking about which of these concerns
might be relevant to you. We are all different in what we expect from lenders
and so you need to think about what it is that will be important to you. Even
if interest rates and costs are the most important to you, there may be some
other factors that are important or you might use these to choose between
lenders that are very similar in cost. It is worth spending time thinking about
what you want and making a list. As you start to research you may want to add or
take things away from the list as you will be learning more about lenders and
what you should expect from them. This will take some time but it will be worth
it if you can find a lender that matches your expectations.
Interest rates can be a source of stress for many people
This is especially true if they have savings and want to make money from the
interest that they get on them as well as if they have loans and need to pay
interest on them. It is therefore in many peoples minds that a change, whether
that be a rise or fall can have an impact on them. Wondering about how they
might change in the future could also be a concern.
Rates can be quite difficult and the longer the term you are trying to predict them for, the more difficult it is. This is because it is very difficult to look into the future and imagine what might happen. At the moment the main criteria for setting interest rates is inflation. The Bank of England will look at the previous months inflation figure and see how close it is to their target. At the moment that target is 2%. However, inflation does fluctuate slightly from month to month and there are seasonal variations as well. This means they tend to look at the trend over a few months and think about how that might change in the future in order to make their decision. They will also consider how well people are managing as if there is a lot of household debt and people are struggling to pay they may delay putting up rates to help them out.
Predicting what rates might do in the short term is much
easier. You can look at previous trends and also think about what the rates are
and if they are likely to rise or fall. Odds are that if they are low and have
been for a long time then they are more likely to rise and vice versa. However,
recently we have had record low rates and they have remained low for a very
long time, so the trend is not always followed and therefore it is not always
easy to predict.
Economists may try to predict what might happen. Although
they are not always right it can be a guide for you. If you look at what a
selection of them are saying it could give you an idea of what might happen.
However, there is no guarantee that there will not be a big change in the
world, such as a stock market crash or the closing of a bank that could have a
huge impact economically on lots of countries and cause unpredictable
Protecting against rate changes
It can therefore be much better to try to protect yourself from any potential changes in rates rather than trying to predict what might happen. For example, if you have savings, then put them in the highest interest account that you can and keep checking the interest. If there are better interest accounts then move your money. If you keep doing this then you will get the best return that you can. If you move the money to an account where you tie the money up for a few years or have to give notice to withdraw it you might get an even better return. Another option is to use a fixed rate product such as a bond. Again, you will be tied in but you could end up getting a much bigger return this way. Obviously, you need to decide whether you are happy to tie your money up like this or whether you would rather have instant access to it. It will depend on whether you rely on being able to spend it or if you are just keeping it for the future.
If you have loans you need to check rates in a similar way.
Take a look at similar loans to yours with different lenders and see whether it
would be worth switching to a cheaper one. You may also benefit by changing to
a different type of loan. Try to repay the loan as quickly as possible too.
With some loans you can control how much you repay and with others you have a
strict repayment schedule. With these you may still be able to repay more than
necessary in order to get it repaid more quickly. You will need to check that
there is no fee for doing this though. There may be just a small fee which is
affordable or you may find that there is a high amount of money which will be
so much that it will make repaying the loan early too expensive. It will all
depend on the specific loan, so it is worth finding out. If you have any
savings then using those to repay the loan will always be worth it as the
interest you get paid on savings is generally less than what you are charged on
a loan. However, this is not always the case, so check first.