Consumer loans: how to choose sensibly

A consumer loan is among the most expensive ways to borrow money, and the marketing is designed to make it look cheaper than it is. The number that matters is not the nominal rate in the advert, but the effective interest rate — it includes every fee and is the only figure you can honestly compare offers with.

Before you even consider a loan, ask the question: is this a need or a want? A consumer loan used to refinance expensive credit-card debt can make sense; a consumer loan used for consumption rarely does. Marketplaces like Savvy let you compare several offers at once, which is useful precisely because it forces a comparison on effective interest instead of you taking the first offer you see.

Two principles protect you. First: never borrow more than you have a concrete repayment plan for — the shortest possible term gives the lowest total cost even if the monthly payment is higher. Second: do not collect several small expensive loans; it is usually cheaper to refinance your debt into one loan with a lower rate.

The best "borrowing strategy" is often not having to borrow at all. A solid emergency fund removes the need for crisis loans, and good budgeting prevents debt spirals in the first place.

Always compare on effective interest, and borrow short. This is not financial advice — terms vary, and you should read the whole agreement before you sign.