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BEWARE THE LOAN DANGER; Shop around to find the cheapest lender.

Byline: ALEX MORGAN

THINK twice about taking a personal loan to sort out your debts, or you could end up wasting thousands of pounds.

The first three months of the year are a busy time for lenders, as people reorganise their debts after spending too much at Christmas or making New Year resolutions to get their finances under control.

But if you want to cut the cost of your borrowing, don't rush into getting a loan - there are a huge number available and you need to choose carefully to get the best possible deal.

Sainsbury's Finance estimate pounds 1.55billion of loans will be taken out between January and March this year by people hoping to cut interest bills by transferring more expensive debts.

Steven Baillie, Sainsbury's head of loans, said: "Taking out a loan to consolidate disparate debts from previous loans or credit cards can save a significant amount of money in terms of monthly outgoings - especially if you have debt with store cards, which can have extremely high interest rates."

But half of borrowers go straight to their bank, regardless of whether they offer the best rate, and a third get just one quote before selecting a lender. This can be a very expensive mistake.

Someone borrowing pounds 5000 over three years from Sainsbury's, the current market leaders with a typical rate of 8.4 per cent a year, would pay a total of pounds 648 interest. But if they were an existing Barclays customer and went there, they would pay 15.9 per cent, giving an interest bill of pounds 1226.

At Halifax/Bank of Scotland, the rate would be 19.9 per cent, meaning the interest would rise to pounds 1734, while as a new Barclays customer, they would be charged 21.9 per cent, giving a cost of pounds 1686 - pounds 1038 more than at Sainsbury's.

Meanwhile, if they went to Aspire Money, who typically charge 53.9 per cent, the interest bill would be a staggering pounds 4074 - pounds 3426 higher than Sainsbury's.

That is why it is essential to shop around before you sign up for a loan.

The rates you are offered will depend on the amount you want to borrow and the term you agree to pay it back - as well as whether the lender thinks you are a good credit risk.

Generally, the smaller the loan, the higher the interest rate.

This is because lenders want to encourage people to borrow larger amounts, so they earn more interest in the long run.

If this doesn't work, lenders will at least make the maximum amount out of what their customers do borrow.

Similarly, the longer the repayment term, the lower the rate you are likely to pay, because this, too, will earn the lender more overall.

The best rates currently to borrow pounds 3000 over two years are 12.6 per cent from Sainsbury's and 14.9 per cent from Santander. Go for pounds 5000 over three years and the lowest are 8.4 per cent at Sainsbury's, 8.7 per cent at Tesco Bank and 8.9 per cent at the Post Office and Santander.

If you want pounds 7500 over five years, you could pay 7.2 per cent at Nationwide Building Society or Sainsbury's, or 7.3 per cent at Tesco.

But before you take out your loan, check if cheaper options, such as a zero per cent balance transfer credit card, are open to you. Never borrow more than you absolutely need.

The only exception to this rule is if increasing the amount slightly will tip you into a lower interest band, saving you a significant amount of money over the loan term.

For example, the best deal available to someone borrowing pounds 4999 over three years is currently 10.5 per cent at RateSetter.com, giving a total interest bill of pounds 810.

Increase that to pounds 5000 and you could pay 8.4 per cent at Sainsbury's, costing pounds 648 and making a saving of pounds 162. open to you. And never borrow more than you absolutely need.

The only exception to this rule is if increasing the amount slightly will tip you into a lower interest band, saving you a significant amount of money over the loan term.

For example, the best deal available to someone borrowing pounds 4999 over three years is currently 10.5 per cent at RateSetter.com, giving a total interest bill of pounds 810.

Increase that to pounds 5000 and you could pay 8.4 per cent at Sainsbury's, costing pounds 648 and making a saving of pounds 162. open to you. And never borrow more than you absolutely need.

The only exception to this rule is if increasing the amount slightly will tip you into a lower interest band, saving you a significant amount of money over the loan term.

The best deal available to someone borrowing pounds 4999 over three years is currently 10.5 per cent at RateSetter. com, giving a total interest bill of pounds 810. Increase that to pounds 5000 and you could pay 8.4 per cent at Sainsbury's, costing pounds 648 and making a saving of pounds 162.

CASE STUDY

COUNCIL employee Jonathan Stone goes to his credit union when he needs to borrow money.

Jonathan, who lives in Glasgow, has been a member of the Scotwest union since 2004.

The 50-year-old cyclist took his first loan to help him build a touring tandem. He said: "Each part had to be imported and was going to be quite costly. The tandem has travelled throughout Europe with myself and my family."

He was so impressed with the service, he went back to the union next time he needed cash.

Jonathan added: "Scotwest couldn't have been more helpful. Unlike high street providers, they were able to give me a quick decision. There were no hidden charges or fees and they offered really competitive rates.

"I like how the money is taken from my wages before they get to my account."

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Title Annotation:Features
Publication:Daily Record (Glasgow, Scotland)
Date:Feb 24, 2011
Words:1018
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