Cut the cost of existing loans: Use unique calculator to see if you'll save
Want to cut the cost of your current loan? Sadly it isn’t as simple as it seems. Switching to a new loan, even at a lower rate can sometimes cost you more. This cost cutting guide will show you how to find the best new deal, and then use the unique loan switching calculator to see if you’ll really save.
Please note, this article is about unsecured loans, i.e. the type sold by most high street lenders. The issues surrounding Secured Loans, products of last resort that most people should shy away from, are even more complex, so this article is a Secured Loan-free zone...
Sadly, switching loans isn’t like transferring a credit card balance; most loans are inflexible beasts usually designed to be repaid over the full term. Thus if you try and pay yours off early, a raft of hidden costs can skew any possible savings.
The main two types of charges are:
- Early Repayment Penalties
These are effectively fines of one or two months' worth of interest, charged when you repay the remaining balance early. So on a $5,000 loan over five years this could easily be $100.
- Rule of 78
If your loan was taken out three or more years ago, there could be a further hidden penalty, due to the old-style ‘Rule of 78' interest calculations.
These were abolished for new loans from 1 June 2005, yet the British Bankers Association has confirmed that anyone with a loan from before then needs to check with their lender to see if Rule of 78 applies. This hideously complicated formula artificially allocates early years' repayments towards the interest, hardly decreasing the amount you owe.
This means attempt to repay in full early and there'll be much more left than you think. The earlier you repay, the bigger the problem.
If you’ve got a loan, check whether you were sold Payment Protection Insurance (PPI) with it. While for some it’s useful protection, many have it unnecessarily due to pressure/assumptive selling; that’s because it’s often more profitable for lenders than the loan itself.
If you don’t think this applies to you, check as…
What to do if you’ve got PPI
- Do you need it? Check whether you really need the policy. PPI is supposed to cover your repayments, usually for a year in the event of accident, sickness or unemployment. Yet could you meet the repayments another way? Plus if you’re self-employed or unemployed it may not actually be covering you anyway.
Even if it is suitable, if you got the PPI from your lender, it’s likely you’re paying up to four times more than is necessary for it. So see if it’s possible to ditch and switch to save; full details in the Cheap Loan Insurance article.
- Were you missold it? If you were sold inappropriate loan insurance, it’s possible you can get all your money back. There’s been widespread misselling of these policies; read the PPI Reclaiming guide for more.
Many people who’ve tried to repay loans with PPI early have been told it’d cost them enough to burn out a calculator. This is because the lender assumes you borrowed the cost of the whole insurance up front; and therefore you must pay interest on it too.
In recent years the regulator, the FSA, has come down heavily on this, so cancelling existing policies is much easier now. If you were effectively stopped from cancelling it the past you may have a misselling case.
A standard MoneySaving Rule of Thumb is always pay off any debts before stashing any money in savings (read Pay off Debts with Savings). In general this is true with loans too, though due to the repayment penalties you may be financially better off by sticking it in a high interest account and drip feeding loan payments out of there.
Eg If the ‘total repayment' figure of your loan is $5,000, yet to keep repaying it each month costs $5,100 in total, you only gain $100 by paying it off now. Stashing the loan repayments in a top savings account could earn you more (See Instant Access Savings). However, if in doubt of the calculations, always err on the side of clearing your debts.
Quite simply, provided you don't get Payment Protection Insurance, find the loan with the lowest APR (Annual Percentage Rate) of interest for the amount you are borrowing. For much more information about the current best deals read the full Cheap Loans Guide.
Do beware though, all the top loans compared below are 'typical rates', which means only 66% of those accepted actually need be given these rates; depending on your credit score you may pay a lot more (see lower credit scorers' loans if that’s an issue).
| Amount | Rate | Lender | Notes | ||
| under $1,000 | Loans aren’t available, see the Cheap Short Term Borrowing or Credit Unions articles. | ||||
| Existing Abbey Customers | 8.9% APR | Abbey* | If you've already got accounts with Abbey, you can get this rate between $1,000 and $25,000 | ||
| over $1,000 | 15.1% APR | Coventry BS | Best for between $1,000 and $1,999 | ||
| over $2,000 | 13.9% APR | Post Office | Best for between $2,000 and $2,999. | ||
| over $3,000 | 12.9% APR | Adsa | Best for between $3,000 and $3,999. | ||
| over $4,000 | 9.9% APR | Barclaycard | Masterloan also offers 9.9%. Call it on 0800 0566223. | ||
| over $5,000 | 7.8% APR | YourPersonal | Rate for homeowners only, although it's not a secured loan. For non homeowners Sainsburys offers 8.8% on amounts between $5k and $6999. | ||
| over $7,500 | 8% APR |
| For non homeowners borrowing above $7.5k the following are available: 8% from Alliance and Leicester* (up to $15k); between 8% and 8.2% from Tesco depending on length of loan (up to $25k); 8.2% from Asda (up to $25k). | ||
| over $25,000 | Maximum borrowing on a personal loan is $25,000. If you're looking at this, be very careful, it is a large commitment. You could get a combination of loans or add the debt to a remortgage, though that usually means paying over a longer period, more interest and securing the debt on your house. | ||||
Want more loan options / got a poor credit score?
These cheapest loans are updated daily, if you want to see a list of many available loans then there are loan comparison services at Moneysupermarket* and Uswitch*, which give a wider range, though may miss some of the top payers above. Moneysupermarket’s comparison also gives you a rough credit rating assessment, and then factors this into the available loans.
It's possible to use plastic loans to cut the cost further
Credit cards are a much cheaper way to borrow than loans; longer term borrowing at 6% is do-able. Yet if you already have a loan, shifting it to a credit card isn’t an easy operation. It is possible, although tricky, to do though.
Only attempt it if you’ve got a good credit score and, more importantly, are very money savvy. You can find full details in the Cheap Credit Card Loans guide. To calculate the saving by doing this, simply use the loan calculator above, and ensure you’ll make the same repayments to the credit card that you would’ve done for a loan.
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