Every week Clare Francis, financial journalist and editor of comparison site moneysupermarket.com will offer tips and advice on all things money-related to help iVillagers make the most of their hard-earned cash. From energy bills to car insurance; credit cards to children’s savings accounts; mortgages to discount vouchers Clare will show you how to make sure you’re getting the best deal
Be a savvy borrower
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Millions of people will take out a loan this year and for all sorts of reasons: home improvements, to buy a car, consolidate existing debts are just some of them.
The good news, if you’ll be needing to borrow, is that we’ve seen something of a rate war break out in the loans arena over the past week with M&S Money and Tesco both having cut their rates.
M&S Money is offering the lowest rate. Its loan has a typical annual percentage rate (APR) of 6.0% if you borrow between £7,500 and £14,999. Tesco’s loan charges a typical APR of 6.1% on its rate while Alliance & Leicester has a rate of 6.3%. Nationwide and Sainsbury’s Finance both have typical APRs of 6.4%. As with the M&S offer, these rates are available for loans between £7,500 and £14,999.
But most people don’t take advantage of these deals…
However, despite the fact all these great rates are available the majority of people go to their bank when they want a loan.
I think one of the main reasons why this is the case is because many people assume they have a better chance of being accepted if they apply for a loan through the bank they have their current account with. Another factor is our tendency to ‘stick with what we know’.
While in many ways this is understandable, if you go down this route it’s likely to prove a costly option.
More than 70% of people bank with the big four banks - Barclays, HSBC, Lloyds TSB and Royal Bank of Scotland/Natwest. Yet the average loan rate of these four providers is 8.5% on loan of £7,500. Assuming you borrow over a five year term, this would cost you £499.50 more in interest than if you took a loan from M&S.
Therefore, before you race to your bank to apply for a loan, check what else is available.
There are a few other things you should do before you make a loan application...
- Check your credit file - Lenders look at your credit report when assessing any application for credit that you make. Your file contains information on how you have managed credit in the past and show what credit you have available to you at the current time. If you have missed any loan, mortgage or credit card payments it will be registered on your credit file.
However, sometimes the information on your file can be wrong or out of date. If it is you can issue a ‘notice of correction’ to have it put right. This is important as it could make the difference between being accepted or having your application declined.
You can get a copy of your credit report for just £2 from the credit reference agencies Experian or Equifax.
- Be aware you may not qualify for the advertised rate - Loan and credit card providers must advertise a ‘typical’ APR, but this rate only has to be offered to 51% of successful applicants. As a result, even if your application is accepted, you may be offered rate higher than that you saw advertised.
The lowest rates will only be available to those with excellent credit ratings and perfect credit histories. This is another reason why it’s well worth checking your credit report before making a loan application.
- If you're looking to get on top of your finances in 2012, check out Clare's suggested financial resolutions
- Talk finances on the Money Matters boards
- Check out iVillage's range of newsletters
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