Five things to check when making loan comparisons

We’ve tried to take some of the hard work out of decision-making with a handy checklist of just five factors to weigh up in the process. But first you’ll have to figure out exactly what sort of loan, or credit, you want. Short-term loans, car loans, personal loans, business loans, – unfortunately, the list goes on…

You can take a look at some of our other blog posts by selecting the loans category if you're unsure about the merits/drawbacks of any of these products. The important thing to check, though, is that you're comparing like for like. Just as you wouldn’t judge a Michelin-starred menu against a MacDonald’s Happy Meal, there’s no point looking at the interest rate of a payday loan against that of one secured on your house. Different types of borrowing will suit different people and situations, and the best loan for one person won’t necessarily benefit – or even be available – to the next.

And even within these products there can be countless variables, including the term (or length) of the loan and the amount you’re looking to borrow. Try to keep these constant when you compare loans or your research will inevitably be skewed.

• Check who offers the best loan APR?
• What’s the total amount payable on the loan?
• What are the loan interest rates like?
• Is the lender regulated and trustworthy?
• Can you afford the loan?
• Final thoughts

Check who offers the best loan APR?

APR, or Annual Percentage Rate, is the standard way of showing how much your loan will cost because not only does it take into account the interest you’ll be charged, it also includes fees you might be required to pay on top of that. The figure is averaged out to give a yearly rate and designed to help make life easier when comparing loans. Generally, the lower the APR the cheaper the loan for you. 

It’s not the only thing you should consider, but it’s a biggy, which is why we’ve listed it first. Be aware, however, that some charges may not have been included in the APR, such as if you pay off the loan early.

When comparing APR it’s best if you’re looking at the same type of loan, the same amount you want to borrow, and the same timing of repayments.

If you think you might be able to pay off a loan early, APR comparisons may not be as helpful as you initially think. That’s because an APR calculation assumes that you'll keep the loan for its entire term and is averaged out to give a yearly rate. Read the terms and conditions carefully for a better picture of what the loan will cost if you’re thinking of cutting it short.

Note, too, that not everyone who applies for a loan will be offered the same APR. Something called ‘representative APR’ is used by lenders to highlight the lowest rates they will offer to 51% of people who are accepted. If you’ve a bad credit score or no history of borrowing, however, you may be among the 49% of borrowers given a higher APR than the one you see advertised. For this reason it’s important that wherever possible you understand the exact APR (also known as your personal APR) up front before you apply, and not just the representative one. For more information on APR, see our guide ‘What APR means for you?’.

Ask yourself:

• Is this the best APR I can get?
• Are there any other charges not included in the APR?
• What’s my personal APR (as opposed to the representative APR)?

What’s the total amount payable on the loan?

To find out exactly how much you’ll owe overall, you’ll need to know of any costs that are not included in the APR. We've already mentioned early redemption fees, but there could also be an arrangement fee for loans or balance transfer fee for credit cards. This is usually added into the total and you pay interest on it as well. 

It’s also worth investigating charges for late or missed payments, which can increase the total you ultimately pay back quite considerably, as well as insurance cover. The latter should make sure your repayments are covered if you're unable to earn because of illness or redundancy. However, it’s sometimes added to the loan and, again, will jump up the amount you have to pay.

Ask yourself:

• What is the total amount I will pay back?
• Are there extra charges if I pay the loan off early?
• What happens if I miss a payment?

What are the loan interest rates like?

Interest rate is the annual cost of a loan to a borrower expressed as a percentage. People sometimes confuse it with APR which, as mentioned above, is the annual cost of a loan plus the fees. So APR is almost always higher than the interest rate. 

Your lender should be able to tell you the total interest you’ll pay over the life of the loan, which will be affected by your payment timeline as well as by how often interest compounds.

But you should also check whether the interest is variable or fixed rate. If it’s the first, your interest rate may change during the agreement and your repayments could go up or go down.

Fixed rate interest, by contrast, shouldn’t be changed once the agreement is made and your repayments should stay the same.

Ask yourself:

• Will the interest stay the same?

Is the lender regulated and trustworthy?

Of course, it doesn't all boil down to how much the loan costs (although we appreciate this is a huge factor); you should also consider the lender itself and whether they provide the information you need clearly, are transparent about all costs involved in their loan, and if they make it easy for you to contact them with any questions or concerns.

You could also consider how their customers rate them. Review sites give a useful gauge of how other borrowers have fared and could flag up potential issues early.

Most importantly, however, you’ll want to check if the lender is authorised and regulated by the Financial Conduct Authority. This ensures you’re given certain protections, and that required price caps are applied, which help to keep the cost of short-term loans low. Regulated lenders are also required to lend responsibly. This means they will perform checks to make sure you can afford the repayments and that the terms are realistic for your circumstances.

If they aren’t FCA authorised, they’re acting illegally and aren’t worth the risk. 

Finally, and especially if you’ve got a poor credit history, consider how the provider makes its lending decisions. Applying for a loan sometimes means a ‘hard search’ is placed on your credit report. Too many hard searches can ultimately hurt your credit score, especially if the lender refuses your application.

You can still shop around without leaving a financial footprint by asking lenders for a ‘quotation search’ instead. They’ll still be searching your credit record, and you’ll still find out whether you’re eligible for money and receive a quote, but it won’t affect your rating in future as other lenders won’t see it. This is often referred to as a ‘soft search’ or ‘soft credit check’.

And remember, even if your loan is approved, borrowers with poor credit history may be subject to considerably higher interest rates than applicants with a good record of borrowing. If you’re worried, look for providers that approve loans based on your ability to afford the repayments in a sustainable way.

Ask yourself:

• Is the provider FCA regulated?
• Do I fully understand the credit agreement I am about to sign?
• Will the loan application leave a mark on my credit score?

Can you afford the loan?

The golden rule of loan comparisons is to be absolutely confident you can meet the repayments quoted. Failure to do so can potentially result in hefty fees and damage to your credit rating.

A regulated lender will perform their own affordability checks, but you should do your homework first by working out your monthly budget – basically how much money you have coming into your account and how much goes straight out again on bills and other spending. The spare income left over is what you’ll be dipping into each month for repayments, so make sure there’s enough of it.

If you’re looking to lower your repayments, look at spreading your loan over a longer period. It will mean paying more in the long run, but it should help make your borrowing more affordable on a month-to-month basis.

Ask yourself:

• How much can I afford to repay each month?
• How long do I want to pay for?
• Am I expecting a change in circumstances during the lifetime of the loan? If so, how will it affect my ability to repay?
• Does the lender require security?

Final thoughts

When comparing loans, it’s generally a good idea to get quotes from at least three different lenders (and more, if possible). And, rather then heading straight to your local high street bank, you could consider different types of lenders, as online banks with their lower overheads might often offer cheaper rates and easier qualifying requirements.

Loan comparison sites could be a good way to get an overview of what’s on offer. Bear in mind that individual price comparison sites don’t all give you the same results and some lenders might not even actively advertise their products on other sites. So it’s worth checking out a few before you decide. What it costs in time could save you a lot financially.

Finally, remember that applying for a loan might sometimes mean a ‘hard search’ is placed on your credit report, which can ultimately hurt your credit score. Wherever possible, ask lenders for a ‘quotation search’ instead to avoid leaving a financial footprint.

Once you’ve picked a few potential providers, the five pointers above should help you narrow down the field and make an informed decision about which loan is best for you – and you alone.