Personal Loans - The Cost Of Switching
Posted by MyChoices on 04/26/08 in Uncategorized
If you currently have a personal loan, then chances are the length of the loan will be around two to five years, with loans over £10,000 usually taken out over longer terms (i.e. seven to ten years).
What happens though, if you wish to pay off your loan quicker than the agreed date, or move to a different lender? Well, even though lenders are often trying to win over their competitor’s custom by offering lower interest rates, it may actually cost you more to move to a different lender.
First of all, if you took your loan out before 31st May 2005, then under the Consumer Credit Act of 1974 you may fall short to the Rule of 78, which can cost you dearly.
Although difficult to calculate, this rule essentially means that the sooner you pay off your loan, the more interest you will have to pay. The number 78 is based on the calculation the rule uses, based on the 12 months of a one year period; which added together, equal 78.
For example, if you have a loan that is to be repaid within one year and you decide to repay it fully within the first month then you will be charged 12/78ths of the interest, 11/78ths in the second month and so on. As you can see, it can prove considerably expensive to repay your loan sooner, with larger sums of money obviously resulting in larger interest repayments. The problem is that this is often a hidden penalty, which lenders are legally allowed to impose if they choose too.
If you took your loan out after the 31st May 2005 and try to repay early then chances are you will have to pay an Early Settlement Penalty instead of succumbing to Rule 78. Although calculated differently, involving the charge of one or two month’s interest, it is often the first month’s interest that is charged, so again, can prove costly.
As a general rule if you find a loan with an interest rate more than 2% less than what you are currently paying, then it may be worth considering a switch.
With the personal loans market being so competitive, trying to find cheaper personal loans shouldn’t prove too difficult. The internet is an excellent resource for more information and advice on personal loans.
Tags: loan, loans, personal loan, personal loans
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