One in five adults don’t know the difference between a personal loan and payday loan
UK households are borrowing more money than ever before, but many do not understand important details about the debt which they are taking on, according to the price comparison site.
Payday loans have come under intense criticism for charging very high interest rates, often with a representative APR of 1,266 per cent, and many lenders have closed down.
By contrast, personal loans, when managed responsibly, can be a much more cost-efficient way to borrow money for one-off larger purchases.
However, Compare the Market found that more than a quarter of UK adults overestimate the cost of taking out a personal loan and a further 20 per cent believe personal loans are too expensive to pay back.
According to UK Finance, £35bn worth of personal loans were taken out in Q1 2019. Compare The Market found the most popular reasons for taking out a personal loan included buying a car (41 per cent) and paying for home improvements (16 per cent).
But despite the competitive interest rates available, the research suggests that many people have a blind spot when it comes to taking out this type of credit and that people are not aware of how to maximise their chances of securing a loan or borrowing at the best rates possible.
Six in 10 (58 per cent) people admitted they had no idea what their credit score was and 82 per cent said they had never researched how much they could borrow via an online soft checker before applying for a personal loan.
Compare the Market has launched a Personal Loan Eligibility Checker which calculates the percentage chance of being accepted for a loan, without impacting a borrower’s credit score.
John Crossley, director of money at Compare the Market, said: “Personal loans are a sensible solution for many people, especially if you are looking to borrow a larger amount of money for a one-off purchase or project. For borrowers who want the discipline of making a fixed monthly repayment, personal loans can be preferable to a credit card where you have the flexibility to pay what you like every month, as long as it is above the minimum payment. In many cases, personal loans also have lower interest rates than credit cards.
“When applying for any sort of credit, it’s important to take the time to understand how likely you are to be accepted. Repeated credit checks can damage your credit score but completing a soft check online will give you an idea of how much you can responsibly borrow without putting a black mark against your name. Interest rates can vary significantly between providers, so it is always a good idea to shop around for the most competitive loan which offers the best deal.”