When people take out a loan, their reasons are often varied, but one way of categorising them is to consider whether the money will be used for a luxury item, like a nicer car or a holiday, or whether the money is required for a more definite reason, such as to repay business debts or to fund a necessary home repairs. Whatever the case, everyone wants to pay as little in charges to finance that money. They want the cheapest loans they can find.
Charges on a loan come in the form of interest charges and something we'll call fees. The types of fees are discussed below, but during the process of a loan search, everyone is looking for the lowest interest rates and, if they are able to spot them, the smallest fees, ideally no fees at all. Working with a broker who already has some knowledge of how different lenders work, will help most people home in on the cheaper loan deals more quickly
Commonly the meaning of cheapest is something that costs the least amount of money. In loan terms, most people take that to mean the lowest monthly repayments for a given loan amount repaid over a given period of time. However although that may be true in the majority of loan arrangements, there are times when other factors need to be taken into account when working out which loan is the cheapest.
Not all loans are fixed rate, so in times of rising interest rates, monthly repayment amounts are liable to increases in line with base rate changes. Then additional fees need to be considered, arrangement or broker fees are common examples. Then there are some unknown factors which are typically early repayment charges or non-repayment penalties. Be careful with so-called repayment holidays. Without knowing the impact of such arrangements and checking the details, many people just rack up further uneccessary interest payments.
Obviously the monthly repayment figure multiplied by the number of months over which the loan is repaid (for a fixed rate loan) will make up all if not the majority of the cost of a loan. In the case of loans where this is not the only expense, then some careful calculations should be done to work out whether one deal is in fact cheaper than an alternative deal.
These additional expenses usually fall into 3 categories. Those falling before the loan starts, those expected fees at the end and those additional fees that come into play if you change the terms of the loan after the initial contract has been arranged.
Many people fall into the trap of adding the upfront charges onto the value of the loan, so what may already seem quite expensive fees, become even more expensive as they are repaid over several months, with interest added along the way.
