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How to Calculate Which Loan is Cheapest

by Mike

This is a guest post from the folks at MoneySuperMarket.com.  That’s why you’ll see £ used instead of $.  :)

Borrowing money in the current economic climate can be more difficult than ever as lenders adopt a conservative approach to lending in the days since the credit crunch.  If you need to borrow money there are still some good deals to be found on the market. You just need to carry out a little research and ensure you get the cheapest one with the help of a loans calculator.

Different types of loans are available for different circumstances. Generally, you can only borrow up to £25,000 with an unsecured loan and they have fixed rates, so you can be certain of and plan for your fixed monthly repayments.  You should be aware that the advertised rate is a typical rate and lenders will assess a personal rate for you based on your credit score. If you are deemed as high risk, your rate will be higher or you may be refused altogether.

You might think it is a good idea to shop around by applying for a number of loans to see what offers you get. However, this strategy can detrimental to your credit rating.  Every time you apply for a loan, regardless of whether you take it or not, it is recorded on your credit history and it can set off alarm bells with potential lenders if you have applied for many loans.

A better approach is to use a loans calculator to estimate your credit score. Simply input a few personal financial details and the calculator will help you find loans you are eligible for and those with the best rate.

If you think you will have trouble finding cheap loans because of your credit history, there are things you can do to improve your credit score.

You can see your credit history for nothing through certain companies and if you think any of the information is incorrect, it can be marked as disputed while you talk to the relevant company.

It may not seem like something which could improve your chances, but keeping your presence on the electoral role up to date can also help, as lenders are more certain the information they have on you is current.

Keeping too many unused credit options open is another bad idea. Cancel any credit cards you do not use and try to reduce any existing debts, for example credit card debt.  Lenders will be reluctant to lend or give you a higher rate if you have too many lines of credit open or you have a lot of outstanding debt.

You will certainly find the cheapest loans using a loans calculator if you stick to some basic borrowing principles. Only borrow what you need, even if you are offered more. You will only end up paying more interest at a higher overall cost.  Always look for the lowest APR and make sure you know the full repayment cost of the loan. The total loan cost allows you to make an accurate comparison between loans.

Another thing to look out for is additional extras which you do not need. Cheap loans suddenly become more expensive if you add on unnecessary extras, such as a payment holiday or cash back offers.

Shorter loan terms may cost more in monthly repayments but overall, generally cost less than borrowing the same amount over a longer period. A loan calculator is a great tool for trying out different repayment terms to see what suits you best, although you should always make sure you are comfortable with the monthly repayment amount.

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