There are a number of different factors that can make one loan much better value than another.
In South Africa, low levels of financial literacy mean many consumers don’t compare loans on a like-for-like basis or do anything to try and improve the rate they receive.
Comparing loan providers is absolutely essential. This loan comparison guide from Wonga a is a good starting point to help you understand just how much seemingly similar financial products can differ. But as well as comparing loan providers, what else can you do to secure the best possible rate on a loan? Here’s a quick guide.
- Think carefully about what you want from a loan
Applying for a loan should never be a spur of the moment decision. You should think very carefully about what you want the loan for, how much money you’ll need to achieve it and how long it will take to repay. There are loan calculators on comparison sites that allow you to play around with different loan amounts and repayment periods so you can find the best possible fit for you. Generally speaking, the longer you borrow the money for, the higher the cost will be. However, you must also make sure you can comfortably afford the monthly repayments. That’s the balancing act you need to achieve.
- Improve your credit score if you can
Your credit score is one of the most influential factors in the rate you will be offered when applying for a loan. As a general rule, the higher your credit score, the lower the rate you’ll receive. The good news is there are a few simple steps you can take to improve your credit score before applying for a loan.
- Only apply for one loan at a time
You might think that widening your net and applying for a number of loans at the same time is a simple way to find the best rate. However, every time you apply for a loan, some lenders will run a credit application search (also known as a ‘hard’ search) that will leave a mark on your record. If there are numerous hard searches made within a short period of time, it could damage your credit score. In turn, that’s likely to impact the rate you receive.
- Check that a loan is the cheapest way to borrow
If you want to borrow a smaller sum of money, you may find that a loan does not actually provide the best value. Credit cards and bank overdrafts are common ways of borrowing smaller amounts of money that may offer a lower APR. You could also find there are other advantages associated with a credit card or overdraft. For example, you’re likely to the flexibility to repay the money whenever you want as long as the minimum monthly repayments are made.
- Borrowing more may cost you less
Believe it or not, you may be offered cheaper rates of interest on higher loan values. It’s a general rule that the more you borrow, the lower the APR. That’s not a reason to borrow more than you need. However, if borrowing an extra few hundred Rand would push the loan into a lower APR bracket, that could be a very simple way to reduce the overall cost of the loan.
How did you secure the best possible rate on a personal loan? Please share your tips with our readers in the comments below.