A personal loan is a sum of money, which in the UK could be borrowed from a bank, a building society or a finance company and used for any purpose, except commercial. They are mostly taken as a car loan or in order to make home improvements or to cover medical bills. The loan is then being repaid over a specified period of time (loan term) in the form of monthly payments, consisting of a percentage of the originally borrowed sum plus interest.
Before looking for a loan it is important to understand several key terms and abbreviations. The first one is APR which stands for Annual Percentage Rate and shows how much interest rate you are going to pay on your loan in a year. Be aware that a “typical APR” being quoted by a bank or a lending institution does not necesserily mean that you are going to get this rate. By law, in other to be able to quote a typical APR, banks are under obligation to give this rate only to 66% of all those who apply for a loan and you might not be one of them, thus getting quite a different rate, depending on your personal circumstances and credit history. Moreover, the actual interest rate can be either variable or fixed. Variable interest rate stays the same every month throughout the loan term, which allowes to plan monthly payments and not to worry that they might suddenly change. A variable rate is calculated according to the base rate and might drastically rise with changes in the economy.
Take into consideration that the sum of the loan and the interest rate are not the only costs of a loan. Additional expenditure might consist of early repayment penalties, fees or penalties for missed payments and set up or arrangement fees. Statistics show that about 7 out of 10 loans are paid off early, so, it’s a good step to be looking for a loan without early repayment penalties. In order to get an idea of a total cost of the loan, always check the Total Amount Repayabe (TAR), which gives the complete picture, as it includes all repayments, fees and charges payable over the loan term. It is much more useful than APR for deciding which loan is the cheapest overall.
Another thing to be very very careful about is PPI, Personal Protection Insurance – an insurance that is supposed to cover you repayments in case of accidents, unemployment, illness or death. It will be automatically offered to you by the lender, but they are hugely overpriced and the claims ratio for secured loans with the lenders insurance is only 10%, meaning that only one in 10 is eventually paid off. If you really want one (and think seriously whether it is such a necessary expenditure), then take one from an independent broker who will offer a much better deal.
Personal loans vary dipending on the amount, the period over which it is being repaid and repayment conditions. Two major types of loans are secured and unsecured loans.
A secured loan is a loan for which you put up some asset – usually a car or a house – as a collateral, a guarantee for the lender that you will repay the debt. A secured loan has lower interest rates, longer periods of payment and bigger sums of money available (over £25,000). But they are more risky, as the lender is capable of literally making you homeless if, for any reason, you fail to repay the loan. “Secure” in this case means that it is more secure for the lender and not for the borrower. Also, secured loans usually have variable interest rates.
Unsecured loans, on the other hand, do not require a collateral and are, therefore, more risky for the lender. As a result, they have higher interest rates and are generally limited to the sums of up to £25,000. One common belief is that with an unsecured loan you will not lose your home, but it is not quite so. If you fail to pay off the loan, the lender may apply to the court for a charging order, which means that when your property is sold, you will only get the money, remaining after all your debts have been paid. Furthermore, the lender may apply for an Order of sale, and if the court grants it, the home will be repossessed as in a situation with a secured loan. Anyway, since all this requires the lender to pass through a lot of legal procedures for a reatively small gain, it is not an option favoured by the lenders. Unsecured loans tend to have fixed interest rates and are regulated in Britain by the Customer Protection Act.
Some important things to bear I mind before taking out a loan:
However attractive it may seem, avoid taking a loan with deferred payments, which means that you only begin to pay it back some months after the start of the loan. The trick is that interest is still charged for these months and in the end you just pay more. The same rule applies to the loans with “payment breaks” or “repayment holidays” during the term. Some banks also offer a “same day” service, meaning that you get the money on the day of the application, but again, this service is not free and a pretty handsome sum of money is charged for this.
When taking out a personal loan make sure you understand all the key factors and all the possible pitfalls associated with a particular loan or your personal financial situation. Before actually applying for a loan, check you credit history and calculate your credit rating in order to know what conditions to expect from a lender and to what type of loan you might be entitled.
Always calculate carefully beforehand the sum that you need to borrow and stick to it, even if the lenders try to offer you more. Realistically assess the period of time over which you would be able to repay the loan: you should be able to meet all the monthly payments in order to avoid penalties for missed payments, but, on the other hand, longer loan term means paying more in interest. Internet nowadays offers infinite possibilities to compare offers from different lenders and it is always a good idea not to hurry and to shop around for the best deal.