Did you know that you can save on the cost of your personal loan by comparing products?
Many of us have had to take out a personal loan at some point. Whether it was to finance something that we wanted to buy, to pay rent, to pay school fees or even to invest – there are a lot of personal financing options available out there. So how do you choose the products at the lowest costs? We will show you through our “Compare To Save” series, how you can compare personal loans to save money and what you need to know to pick the right product.
Save by comparing: flat rates and reducing rates
When looking at personal loans, you will be quoted different interest rates depending on the products and the banks offering them. An important first step in choosing the best product is to understand the difference between flat rates and reducing rates.
Flat rates are usually lower than the reducing balance rate – a flat rate simply calculates the interest on the entire loan amount, without considering the amount already paid off. On the other hand, a reducing balance rate calculates the interest on the outstanding balance of your loan, which obviously reduces as you pay off your loan. Without looking at the details, you might be tempted to pick a loan that charges a 4% annual interest rate over one that charges a 6% rate annually. But if the 4% rate is a fixed rate and the 6% rate is reducing, you will end up paying more interest over the tenor of your loan. In this example, a 4% annual flat rate on a loan amount of AED40,000 taken over 4 years will cost you AED6,400 in total interest. While a 6% annual reducing rate on the same loan amount will cost you AED5,091 in interest.
So before you pick the ‘lowest’ rate, make sure you have clarified the method of calculation of the rate advertized by your bank, and compare all the available products to get the best money-saving option.
Loan at an annual reducing rate of 6%
| Balance | Principal paid | Interest paid | Total yearly payments | |
| year 0 | 40,000 | |||
| year 1 | 30,879 | 9,121 | 2,152 | 11,273 |
| year 2 | 21,196 | 9,683 | 1,589 | 11,273 |
| year 3 | 10,915 | 10,281 | 992 | 11,273 |
| year 4 | – | 10,915 | 358 | 11,273 |
| 4 year total repayment | 40,000 | 5,091 | 45,091 |
Loan at an annual fixed rate of 4%
| Balance | Principal paid | Interest paid | Total yearly payments | |
| year 0 | 40,000 | |||
| year 1 | 30,000 | 10,000 | 1,600 | 11,600 |
| year 2 | 20,000 | 10,000 | 1,600 | 11,600 |
| year 3 | 10,000 | 10,000 | 1,600 | 11,600 |
| year 4 | – | 10,000 | 1,600 | 11,600 |
| 4 year total repayment | 40,000 | 6,400 | 46,400 |
[Related: Fixed versus reducing interest rate]
Save by comparing: multiple debt and consolidated loan
Have you got several loans and credit cards with different banks? If so, you could be spending a great deal of money servicing your debt without knowing it. This is because each of your loans and credit cards likely charge different interest rates. A solution to this problem could be to combine your loans. This is called refinancing. But before you refinance your debt, there are a few things to consider. When refinancing, some banks will extend credit to you at longer repayment periods, especially if the loan amount is large, meaning that you end up paying interest over a longer number of years. So in reality, your total cost could end up being higher if you combine your debt. Bear in mind that many banks will typically charge you an upfront arrangement fee to get a new loan. You may also be required to pay a fee when settling your existing loan. This early settlement fee is capped at 1% of your outstanding loan amount. There are several products out there quoting different interest rates and fees and your cost of refinancing can add up depending on which one you choose. So remember to compare so that if you do decide to consolidate your debt, you will be better off financially.
[Related: Consolidation loan may be the answer to your debt woes]
Editor’s tip:
Always remember that comparing products before taking out financing can save you money. So before you go ahead with a personal loan, look at the different rates and fees and choose the product that not only offers you comfortable repayment plans, but that also saves you money overall. Our personal loan guide shows you how much your instalments will be as well as how much you can expect to pay in fees. For more tips on how you can save money by comparing, follow us on twitter and check our #CompareToSave series.