Tag Archives: loans

Low Interest Rate Does Not Always Mean Cheap Loans

Summary: Cheap loans are a reality and not a myth. However, a low interest rate in itself does not mean that the loan is cheap because there may be many other costs involved apart from the interest rate.

The general perception is that a loan that involves low rate of interest is beneficial. This, however, does not hold true in every case. Sometimes, manipulative lenders offer you very low interest rate but they raise the total cost of borrowing by charging loan arrangement fee and early repayment penalty. In this way, a consumer who is not aware of these things may think that he has got a good loan deal from the lender whereas the reality is very far away.

There is a concept of annual percentage rate or APR that has been specially introduced to counter the manipulative tactics adopted by some lenders. APR helps borrowers to compare different loans on an equitable basis. APR is the total cost of availing credit that a borrower has to pay to the lender, expressed in simple annual percentage. APR includes interest rate and all other costs and fees relating to a loan.

Since all the loans are expressed in terms of an APR, a standard practise in the UK loan industry, the loans have become comparable on equitable basis. Any borrower who wants to take a loan should compare it on the basis of APR, the best available measure of finding out cheap loans.

The low rate loans available with the banks and other financial institutions may require you to fulfill some conditions. The banks may ask you to provide a loan guarantee by placing your home as a security. This requirement becomes indispensable for the lenders when you want a large amount of loan, say £100,000. Lenders want to ensure that the loan that they are advancing to the consumer is backed by a concrete security. If you are ready to oblige a lender by giving your home as security, you can easily get low rate loans. In such a situation, the lender may also overlook any other shortcoming that you possess like a not so good credit rating.

In a bid to take cheap loans, you should not forget the real purpose for which you are taking a loan. It is very important that the loan fulfills your entire financial requirement and the ultimate purpose, whatever it may be. If you are confronting a situation where two loan offers are available, one slightly expensive than the other, then you should decide on the basis of collateral benefits that you are likely to derive out of two offers. The interest rate becomes unimportant in such a scenario.