When picking between loans it can be easy to think that the one with the lowest interest rate will be the best option. This is probably because lenders will use their interest rates as a way of marketing their loans, claiming that good rates are the best. You will also find that comparison websites will compare based on interest rates and so it can make people think that is the only important thing to worry about. However, it is important to understand how loan costs work and also other factors that should be an influence in your decision.
You may find that when you look at loans there are two interest rates that are given and they are quite different. This can be confusing. It is worth noting that it is the AER which gives you a true comparative value as it includes any additional costs to the actual interest that you are charged. Comparing loans like for like can be tricky because of this and it can be best to try to work it out for yourself rather than relying on comparing interest rates alone. What you need to know is how much you will repay in total and you should be able to work this out if you know what your repayments will be and how many repayments there will be. If you do not have regular repayments then you will have a trickier calculation to do. This is because loans such as credit cards or overdrafts will have their cost determined by how long it takes you to repay. You will need to try to work this out so that you can calculate the costs. If you have trouble with calculating any of the costs then you should be able to contact the customer service department of the lender and ask them to calculate it for you.
It may seem like a lot of work but this is important for two reasons. Firstly, you will be able to compare costs of the loans allowing for all of the factors such as one-off fees and things like this but also it will help you to see how much you will be expected to repay each month. It is really important to be aware of how much you will need to repay and then you will be able to know whether you will be able to afford this. It is so important to be aware of this as if repayments are too high then this can have a huge impact on you. It may mean that you have a constant struggle to find the money to pay them or even that you have to give up paying for other essentials to pay them.
There are other things that you also need to think about when comparing loans. You should have found out how many repayments you will be expected to make. Think about whether you will be happy repaying your loan over that period of time. You may find it quite a burden to have a loan lasting for a long time, but alternatively you may feel that you will be happy repaying over a long period if it means that you will find the payments easier to make.
Other factors that borrowers may consider involve the specific lender. They may feel that it is important for them to use a lender that they can trust. This may mean they want one that they have heard of or that they know other people have used successfully. It may be more to do with online reviews being good or customer service being outstanding. It is worth thinking about whether any of these things are important to you. Whether you feel that they would make a big difference to you if you are picking between them. It may not feel that it will make a great deal of difference but it really could. Think about the difference between a lender that is happy and willing to answer questions and queries quickly and correctly compared to one that takes a long time to give an inadequate answer. Also consider the value in using one that has good reviews and comes recommended form people you know compared with one you know nothing about. You will be able to feel more confident that you will have a positive experience if you use one that you feel you can trust.
So, the lowest interest rate does not necessarily indicate that the loan will be the best. Not only does it not even necessarily mean that the loan will be the cheapest but you need to consider whether you can afford the repayments and what the lender is like as well. It is worth considering these things because they can make a difference to your experience as a borrower.