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Choosing a loan provider

Choosing a loan provider

Whenever a consumer decides to take out a loan they are faced with a seemingly overwhelming set of choices. Not only are there various types of loans out there but there are also an awful lot of lenders who could potentially help them out. So, what are the primary considerations when deciding on which loan to choose?

Key factors to consider before taking out a loan

The first choice that consumers have to make is whether to take out a secured or unsecured loan. A secured loan can only be taken out by those who can offer some form of guarantee to back up the loan. Typical security here includes your home or an item of high financial value. Lenders use this security to guarantee the loan -- so, if a consumer defaults on their repayments the lender can use the security in order to recoup their money. Unsecured loans do not require any form of security.

In general terms secured loans will come with lower interest rates than their unsecured equivalents. This is based on the fact that the secured element of the loan gives the lender a guarantee that they will eventually get their money back even if something goes wrong so they can afford to charge less in interest. Consumers may also find that secured loans can be taken out for higher sums -- some unsecured products may have a cap on lending. For this reason many consumers choose unsecured loans for smaller purchases and secured ones for larger ones.

Interest charged on loans is a percentage figure referred to as the Annual Percentage Rate (APR). This represents the sum that will be added to the loan in the form of interest -- in other words the cost of borrowing the money. In some cases, loans will come with a fixed APR so that the borrower will make exactly the same payment every month for as long as the loan lasts. In others the APR may be variable which means that the repayments could go up or down depending on market interest rates.

Lenders advertise their loan products accompanied by "typical" APRs. Thus, seeing an APR on a loan advert in a paper or on TV does not mean that this is the rate that will be agreed with each and every applicant. The lender actually decides what to charge once the consumer has asked for a quote or made an application. The APR charged will be based upon a variety of factors including your credit history and credit score, together with the lender's own internal risk assessment criteria. The greater the degree of risk, the higher the APR charged.

In general terms you will get the best deals if you are a home owner with a clean financial track record. If you can be seen (via your credit history) to be reliable in making the repayments against your current and historical financial product commitments then you will be viewed as a good risk. If, however, you have had financial problems in the past such as CCJs, missed or late payments or bankruptcy then lenders will not view you in such a good light. This does not mean that they will necessarily turn down your application. They may simply levy a higher rate of interest.

Things to consider when investigating loan options

Do take the time to read the small print before making any application for a loan. It is important to know what your obligations are before you commit to anything. It is vital to look out for hidden costs and issues before it is too late. These include issues such as early redemption penalties. These are fees that can be charged by a lender if a borrower repays their loan before it has run its course. So, for example, a consumer that takes out a loan for five years but that then finds that they can pay it back in three years may have to pay a fee in order to do so. Not all loans will have this kind of redemption penalty so it can be avoided if you believe you are likely to repay early. Even if you do not think that this will apply to your situation bear in mind that your financial situation may change -- you may get a pay rise, bonus or windfall. So, unless there are compelling reasons to do otherwise, try to find a product that comes without this kind of clause.

NEVER be tempted to make a lot of loan applications at once. You'll get a far better deal if you take the time to look at the options open to you before making an application. Making too many applications at once can, in fact, seriously damage your credit rating / score. Each application creates a "footprint" on your credit rating as the lender interrogates it in assessing you as a risk. Too many of these and you will be seen by any lender as being a high risk applicant. It is better to ask lenders for quotes rather than making applications. It's also essential to keep your credit rating as clean as possible in all cases. Always ensure that you do not miss payments for any of the financial products you hold and that you do not pay them late. Ironically, it is also important that you have a demonstrable track record. Those who are of good financial standing but have had little or no credit in the past will sometimes find that lenders will downrank them for this as there is no track record on which to base decisions.

Finally, always make sure that you borrow money responsibly. It can be easy to take out multiple loans to buy various things or to consolidate existing debts but this can lead to financial problems down the line. The repayments you have to make on an individual loan may seem manageable but if you take out a few loans at the same time you may find that it is hard to find the money to meet your monhtly repayment commitments. Whilst many lenders adhere to "responsible lending" guidelines, they are, after all, in the business of lending money and it is your resposibility to ensure that you can meet your commitments -- not theirs.