It may be easier to simply accept the first loan you see, but sticking with your current bank and failing to shop around could cost you – big time! Read on to find out how to get the best deal for you.

Whether you want to consolidate existing debt, splash out on a lavish holiday or wedding, buy an overseas property or even invest in the latest cosmetic surgery trend, taking out a loan is a huge decision you should never make without looking into all the options carefully. Yet it’s one that many people take lightly, which has led to massive and increasing debt problems in the UK. Find out which option, if any, is for you.

Look Before You Leap

Before you do anything, consider whether a loan is absolutely necessary. It may seem like the easy option to your money problems, but a loan can all too easily become a huge weight you just can’t get out of. “It is always a good idea to consider alternatives before taking out a loan. If you have some savings, then dipping into your nest egg is likely to cost far less than borrowing money, even if it is a low-cost loan,” says David Kuo, Head of Personal Finance at Fool.co.uk.

“Additionally, delaying your purchase and putting away some spare cash is bound to work out cheaper in the long-run.”

Plan a budget to make sure you borrow as much as you need, but not a penny more, even if it’s tempting to have more money now and worry later. The more you borrow, the more interest you’ll have to pay.

Work out how much you are able to pay monthly. Keep your payments affordable so you don’t fall behind, but at the same time don’t make them too small – keeping the loan as short term as possible minimises interest payments.

Fixed? Variable? Flexible?

The first thing you need to do is to decide which type of loan will best suit your circumstances. If you’re disciplined and you’d like the amount you pay off each month to be up to you depending on your circumstances, a flexible or offset loan is best. That way, if you have extra cash lying around, you can pay your loan off more quickly and reduce interest payments.

“Any unexpected changes to personal circumstances can quickly send us down a spiral of debt. Consequently, it is a good idea to get a flexible loan, and make extra payments when we can afford to do so,” says Kuo.
Alternatively, if you’d like to be sure that your payment rate each month will stay the same no matter what the economy is doing, choose a fixed rate loan. This means that you will not be hit by scary interest rate hikes.

But always check for early payment penalties. For the majority of personal loans, you need to be aware that if you wish to pay your loan off earlier than expected you could be slapped with a repayment penalty of two months interest or more – so check up on this beforehand and if possible, opt for a loan that is flexible in this regard.

On the other hand, if you’d like your loan payments to fluctuate in line with the economy, choose a variable rate loan – but for this option you need to be sure you have the budget for higher repayments if the interest rate increases.

Consolidation Loans

Looking for a consolidation loan? You’re not alone – rising debt has led to massive increase in consolidation loans in the last couple of years.

It makes sense to roll up all your debts into one manageable payment, but it may not be the best option for you – especially since you will usually end up paying more money in the long run. Plus, people who take out consolidation loans often feel more secure and run up further debts thanks to additional credit card spending limits, which can be very difficult to resist, especially if money worries have kept you from splashing out on treats for months.

Instead, you could choose to pay off your debts with the highest interest rates first, while you only make minimal payments into other loans that are on another rate.

If you choose a consolidation loan however, do so carefully. “Around half of all consolidation loans carry a penalty for early settlement,” continues Kuo at Fool.co.uk.

“This is unreasonable, and is unlikely to encourage borrowers to pay off their loans sooner.” And whatever you do, don’t use your credit cards until you have fully paid off your consolidation loan!