My Money Tree
Long Term Loan Planning
Choosing a long term loan deal that’s right for you takes some careful thought and planning. When comparing and choosing loan deals, many people fall into the trap of thinking that the lower the APR deal, the cheaper the loan will be overall but that’s far from being the case. Firstly, when considering a loan that’s going to run over many years, it’s important to take into account factors such as how much you’re looking to borrow and whether you want a secured or unsecured loan. Unsecured loans will usually carry a higher APR than a secured loan to reflect the greater risk to the lender but, for smaller amounts of borrowing, the fact that they are usually paid off quicker means that the cost of borrowing is likely to mean an overall lesser repayment total than if you were repaying the loan over a longer period. The secured loan route does have its advantages in that if you’re looking to borrow in excess of £25k and wish to repay that over more than 10 years, the interest rate is going to be lower as the loan is guaranteed against your property so there’s less risk to the lender. By spreading out the cost of repayments over a much longer period, this might suit somebody who want to keep their monthly repayments lower but the overall cost of the loan at the end might be considerably higher so it’s important to do the maths and work out what the total overall cost of the loan might be.
In addition, with a secured loan, you need to ensure what, if any, additional charges you might incur. Some companies might charge you a fee for administering the loan and you may also incur penalty charges if you pay off the loan earlier than your agreement (known as an early settlement or early redemption charge). Also, if you move house during the term of your loan agreement, some companies can charge a transfer fee. Payment protection insurance is also another thing to consider on both secured and unsecured loans. If you became ill and couldn’t work or you lost your job, by having this protection, it can bide you time as the insurance company will continue to make your monthly repayments on your behalf for a pre-determined period.
However, it’s important to make sure that you qualify before you take out this protection as certain insurance companies won’t pay out to self-employed people or those who are in receipt of benefit so you could find that you’re paying out for something that’s not necessary or applicable to you. Payment protection insurance can also add on a considerable sum to the overall cost of a loan and, if you do decide to add it on, be sure to shop around for the cheapest deal. Many lending companies will try to ‘bundle’ it in as part of the loan package they offer you but you’re under no obligation to take it with them or to even take it at all. However, with a secured loan, you should always bear in mind that if you can’t meet the repayments, your home could be at risk. When planning for a long term loan, you also need to consider things such as whether or not you opt for a fixed or variable interest rate as that can affect your total repayments. In fact, there are so many variables, that the best bet is always to seek advice from an independent financial advisor or a reputable broker. They can discuss the right kind of deal for you. The bottom line is, however, to think beyond the APR and to consider just how much both your monthly repayments will be and the overall cost of your loan at the end. If you’re happy with both, then it will probably be the right deal for you.
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