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Personal loans and Household Budgets

Personal loans expenses refer to interest you may pay on personal loans or loans taken from banks for different purposes, such as buying a new car, making repairs to the home, and paying off debts.

Personal loans in Detail

Personal loans are available up to amounts of £25,000 for terms between one and ten years. Repayment is through fixed monthly instalments. Let's look at a personal loan deal for example.

Example 1:

Tesco Bank offers personal loans for amounts between £3,000 and £25,000 for a period of one to ten years. Based on the amount taken, the representative APR varies from 4.1% to 12.3%. Let's say you want a loan of between £5,000 and £7,499, there is a fixed APR of 5.7% for the duration of the loan. There are no initial charges.

How to save on personal loan expenses

Let's look at some tips on how to save on personal loan expenses:

Personal loans versus credit cards:

For loans up to £5,000, 0% credit cards are a better option than personal loans -- provided you repay the balance within the 0% interest period, or you switch to a balance transfer card. For loans above £5,000, you will have to resort to personal loans.

Duration of loans:

Personal loan can be more expensive for longer durations as you end up paying a higher interest as compared to shorter loans.

Example 2:

Suppose you want to borrow £6,000 at a rate of 4.9% for one year, your monthly payment will be £513 and your total interest liability will be £160. However, if you take the same loan for three years or 36 months, you will end up paying an interest of £464 in total.

Prepayment:

You can save on interest expenses by prepaying some amount of personal loans. However, most personal loans have a maximum limit on the amount that can be repaid in a year. For example, Barclay's charges 30 days of interest as fees for early settlement of loans.

Peer to Peer lending or crowd-funding:

This type of loan is available from providers who act as middlemen between individual lenders and borrowers. Banks are not involved in this lending, and so these could be a lot cheaper than personal loans from banks. Some examples are Zopa and Ratesetter.

Example 3:

If you want a personal loan of £16,000 for two years. Halifax will charge a monthly repayment of £721.24 at an APR of 7.9% resulting in a total repayment of £17,309. On the other hand, a similar loan from Zopa will cost £706.26 every month at an APR of 5.7%, resulting in a total cost of £16,590. As you can see, there is a difference of nearly £719 between the total amount payable for the two loans.

Personal loan expenses as part of your household

If you have savings, its best to avoid personal loans. However, in case you want to resort to personal loans you should compare the different APRs in detail. Also, you should try to repay the loan at your earliest.

Our household budget calculator can be a valuable resource in helping you calculate the contribution of personal loan expenses to your household budget.

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