When you take out a loan, you're locked into it for the set term. Right? Well, not always. There's actually nothing to stop you from moving the loan to another provider if you can get a better rate elsewhere – it's called refinancing, and could prove to be a much more cost-effective alternative.
You only need to think about how cheap personal loan rates are now compared to a few years ago to see how much you could save. Let's say you took out a £10,000 loan in 2011. One of the top rates then would have been 6.7%, but compare that to today and you can get the same £10,000 loan for just 4.3% – or £185.13 per month over five years, compared to approximately £196 per month at the previous rate.
That would give you savings of around £132 each year. Doesn't it make sense to consider switching? Personal loan rates are at record lows and seem to only ever be edging downwards, and as long as you meet the criteria there's nothing to stop you from consolidating your debt to make it work for you.
Happily, it seems that a lot of people are taking advantage of that and are reaping the rewards of refinancing. According to research from Sainsbury's Bank around 637,000 customers refinanced existing credit commitments last year, and this trend has continued – in the first quarter of 2014, 36.2% of customers who took out a personal loan did so to consolidate debt, with the average loan for this purpose being £10,334.
Of course, there are a few things you'll need to bear in mind before you switch loans, namely that some providers will charge hefty early redemption penalties if you want to pay it off before the term ends. However not all of them do so it's worth checking the terms and conditions, and if you've got a variable rate you shouldn't be charged extra for paying it off early.
And, even if you are charged a penalty – which for newer loans will usually be around one or two months' interest – the money you'll save from switching could well make it worthwhile. It all comes down to performing a few calculations, and if your remaining monthly repayments will cost more than the potential cost of a new loan – even with redemption charges taken into account – it could be time to consider switching.
Use our loan calculator to find the best rates and see how much you could save
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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