Want to cut the cost of your current loan? Sadly, it isn't as simple as it seems. Switching to a new loan, even at a lower rate, can sometimes cost you more.
This cost-cutting guide will show you how to find the best new deal, and features a unique loan switching calculator so you can see if you'll really save.
In this guide
Please note, this article is about unsecured loans, ie, the type sold by most high street lenders. The issues surrounding secured loans, products of last resort that most people should shy away from, are even more complex. So this article is a secured loan-free zone.
What are the problems with switching?
Sadly, switching loans isn't like transferring a credit card balance. Most loans are inflexible beasts usually designed to be repaid over the full term. Thus if you try to pay yours off early, a raft of hidden costs can skew any possible savings.
The main two charges depend on when you took out your loan:
- Early repayment penalties
If you've taken out a loan since June 2005, it's likely there'll be some early repayment penalties. These are usually one or two months interest, but the only way to know what you'd be charged is to ask your lender, as early repayment charges vary depending on how long your loan has to run, and how much you're paying off.
- Rule of 78
If your loan was taken out before June 2005, there could be a hidden penalty, due to the old-style Rule of 78 interest calculations.
If you have a loan taken out before that date, you need to check with your lender to see if Rule of 78 applies. This hideously complicated formula artificially allocates early years' repayments towards the interest, hardly decreasing the amount you owe.
This means if you attempt to repay in full early, there'll be much more left than you think.
When is it worth shifting?
The simple answer is… when it saves you money. The difficulty is calculating when that happens, as just getting a loan at a lower rate doesn't always work. If you can find a cheaper loan than your existing one, it's worth plugging its details into the calculator below to see if you'll save.
Find the correct info from your current lender
Before plugging your info into the loan calculator, you'll need to call your existing lender to ask it a couple of questions.
What are my exact monthly repayments and how many months do I have left?
This allows you to work out, by multiplying the figures together, how much you've got left to repay. For ease of calculation, just enter the figures below.
How much would it cost me to settle up right now?
What you want to know is how much it'd cost including all penalties, to repay the loan in full immediately. This is called the settlement figure.
Find the cheapest possible replacement loan
To switch loans, you'll need to borrow the settlement figure from the new lender. As the interest rate you get depends on the amount you need to borrow, it's important to have this figure before doing the calculation. To find the cheapest loans for that amount, read the cheapest loans section (plus use our eligibility calculator to see which loans you can actually get).
If you just want to do this quickly, you can try various options in the calculator to find what rate you'd need to get to be able to save, so plug the numbers in!
If I come into a windfall, should I pay the loan off?
A standard MoneySaving rule of thumb is always pay off any debts before stashing any money in savings (read Pay off Debts with Savings). In general, this is true with loans too, though due to the repayment penalties you may be financially better off by sticking it in a high interest account and drip-feeding loan payments out of there.
So if the 'total repayment' figure of your loan is £5,000, yet to keep repaying it each month costs £5,100 in total, you only gain £100 by paying it off now. Stashing the loan repayments in a top savings account could earn you more (See Instant Access Savings). However, if in doubt of the calculations, always err on the side of clearing your debts.
Best Buys Personal loans
If you're looking for a loan, check out the best buy rates below. We list loans by 'bands' as the rate you could get differs depending on how much you want to borrow. Plus, if you want to check if you'll get the loan before applying, use our eligibility calculator to see your chances.
Though, beware, all the top loans compared below and in the eligibility checker are representative rates. This means only 51% of those accepted actually need to be given these rates. Depending on your credit score, you may pay a lot more.
For full information about the current best deals, read the full Cheap Personal Loans guide.[[cheapest-loans-under-responsive]] [[cheapest-loans-over-responsive]]
Get Martin's Free Money Tips Email!
For all the latest deals, guides and loopholes - join the 10m who get it. Don't miss out
It's possible to use plastic loans to cut the cost further
Credit cards are a much cheaper way to borrow than loans; short term borrowing at an equivalent 3%ish APR is possible. Yet if you already have a loan, shifting it to a credit card isn't an easy operation. It is possible, although tricky, to do it though.
Only attempt it if you've got a good credit score and, more importantly, are very money-savvy. You can find full details in the Cheap Credit Card Loans guide. To calculate the saving by doing this, simply use the loan calculator above. Make sure you'll make the same repayments to the credit card that you would have done for a loan.