How To Choose The Cheapest Personal Loan

By Todd Bertshinger

When applying for your next car loan it might pay to plan well in advance to make sure you get the cheapest one. And don't fall for the old trick by choosing the lowest interest rate. The figures that lenders use to sell loans are not always as clear as they should be, and many borrowers discover to their dismay that they do not get the loan they thought they would.

When you think about it, banks are like any other business and will use every sales technique at their disposal to convince you to buy their product. Although lenders are required to act responsibly when it comes to lending money, they are not obliged to tell you about their competitor's products, nor are they obliged to offer you an easy way to compare car loans.

You need to know a few tricks of the trade before you can do the proper comparisons and that's what we are going to discuss right now.

We have just said that the cheapest interest rate does not necessarily mean the cheapest loan. How can this be? Well, look at the following example to find out why. Say you want to borrow $20,000 over five years from a lender charging 14%. Another lender has the same offer but wants to charge an interest rate of 14.5%. The loan repayment at 14% would be $460 per month. Loan repayments at 14.5% would cost $464.95 per month. But if the first lender charges a monthly account keeping fee of $10, the interest rate effectively changes to 15.01%. That's why you should never make a decision based upon interest rates.
The only safe way to work out the cost of a loan to compare with other lenders is to summarise the entire cost over its nominated term. For instance, using the same example above, the first loan at 14% interest would cost a total of $27,600 in repayments plus another $600 in account keeping fees making a total of $28,200. The other loan at 14.5%, without any ongoing fees comes to a total of $27,896.85, a saving of $303.15 over five years. When working out this total, make sure you add in application fees, settlement fees, documentation fees or any other fee that the lender charges. In this way the total amount of money you have to repay can be easily established and you can compare loans between lenders without being misled.
It is a matter of common sense to pay out your loan as quickly as possible. This saves on interest repayments and the overall total you pay back will be less. But beware of lenders who charge early repayment fees. There is no point paying out a loan earlier if the fee charged is more than the saving you would make. Clarify all fees with the prospective lender before you sign up and choose the terms of your loan with this in mind.
When you follow the above points, your next car loan should be the cheapest one on the market. Avoid any upsells and clarify all costs before you make your decision

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