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Are you Mr APR-Average?

YOU want a personal loan. You rate yourself a typical borrower (and spender) – so that means you will be offered the loan at the advertised typical APR, doesn’t it?

Er, no, not guaranteed.

You may have scoured the best buy tables for the lowest APR on a personal loan, but rest assured that such a rate is not available to all applicants.

There are more than 30 loans with an APR of less than 7% presently up for grabs.

But how does your credit rating stack up?

And have you factored in the financial impact of early repayment penalties and the cost of payment protection insurance (PPI)?

Certainly, a personal loan can make better sense than credit card borrowing in coping with Christmas expenses (last year, it has been calculated, over 50% of the UK population spent more than their monthly income over the festive season).

Bear in mind that because of rule changes by the Department of Trade and Industry earlier this year, lenders have to provide clear information upfront, enabling cost comparison.

Before you sign on the dotted line you should know: the total amount repayable over the loan’s term; the frequency of repayment; such things as default or early settlement charges; and the annual percentage rate.

In addition, where a firm touts the term ‘typical APR’, that means it must be offered to two thirds of successful applicants.

So every third successful applicant could draw the short straw of risk-based pricing, whereby credit history is scrutinised and leads to the offer of a loan at a more expensive APR.

That is assuming you are offered the loan at all. Many lenders offering low rates cherry-pick their customers.

You may be tempted to achieve a better APR by switching an existing personal loan, but do the maths.

There might be cash inducements to switch, apart from the lower interest rate (some personal loans can be around 15%, so an advertised 7% is appealing), but will you face a hefty penalty by paying off your existing loan early?

Finally, beware the iniquitous payment protection insurance (PPI). This can torpedo a headline APR with devastating impact.

Morgan Stanley has estimated that PPI can effectively push up an annual percentage rate of 7.9% to 23.6% on a £10,000 loan.

Ironically, many borrowers sold PPI are not eligible to claim under the exclusion terms of the policy. PPI should be optional.

If it is insisted upon or you want peace of mind then go to a specialist provider where premiums will be less expensive and can be paid monthly rather than upfront, as some lenders demand.

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