Personal loans can provide some of the cheapest credit available for mid-range borrowing – between £1000 – £25000. Greater competition between lenders has seen advertised interest rates falling in recent years, which is obviously good news.
However, many lenders have taken to concealing hidden costs within loans to offset the reduction in advertised APR. It is important to be fully informed about these additional costs, often concealed in the small print of many loan agreements, namely Representative APR and early repayment charges.
How Representative APR (Annual Percentage Rate) can be misleading
This is not as straightforward as it sounds; the Representative APR is the figure quoted by lenders when advertising a specific loan but may not be the rate at which the loan is given to you.
Any lender is only legally obliged to offer this loan rate to half of the applicants who are accepted onto the loan. The remaining fifty percent may find that they are paying higher or lower rates, depending on their credit history. If you have a less than perfect credit history, you may find you are paying more than this headline rate. This is known as risk-based pricing.
What you need to know about early repayment charges
It may seem illogical, but paying your loan off early could prove more expensive than simply meeting the monthly repayment schedule. Many lenders include early repayment charges or penalties in the small print of their loan agreements.
The earlier you choose to repay, the greater the charge. This can equate to two months’ loan repayment. Not all loans will include early repayment penalties so it’s important to check with your potential loan provider if you think you might want to repay early.
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Repaying your personal loan early could cost you, rather than save you money. An early repayment penalty can be the equivalent to one or two months’ interest. The earlier in the term you repay your personal loan, the higher the charge.
But some providers have scrapped this charge, so it pays to shop around.
Our loans comparison service shows which personal loans have an early penalty fee attached.