Loans can be a good way of making major purchases. But there are always a few potential traps you should try to avoid. Here are a few tips to follow:
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- Know the difference between an unsecured and a secured loan. Defaulting on an unsecured loan will get you into a bank’s bad books. Defaulting on a secured loan means that whatever the loan was secured on - usually your house - can be taken away.
- Try to steer clear of early redemption penalties. If you want to pay off your loan before the term is up, you should not be penalised.
- Watch out for insurance costs. Many lenders will quote a good rate - until you discover that the rate is higher if you don’t take out their insurance to cover sickness or unemployment.
- Faced with insurance costs, always ask yourself whether you really need such cover: Does your workplace have a sickness scheme? How good is the policy? When might it kick in? How will it help you if you are self-employed?
- For smaller purchases, ask your credit card issuer to consider increasing your card limit - and be sure that you have the lowest rate on your card. Anything over 12 per cent is more than you need to pay.
- So-called flexible, or revolving-door loans, where you can borrow or pay back at will, as long as the total remains within certain limits, sound attractive. But the interest rates charged on many such loans can be very high.
- If you are borrowing to buy a car, always say so. Many lenders offer slightly cheaper rates on auto loans.
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