If we believed everything we saw on the telly, just about every bank, building society and other financial body would like nothing more than to throw cash our way. How many adverts have you seen on the television offering you a chance to get your hands on a hefty lump sum? Or how many special deals have come through your letterbox in the last 12 months, offering you the answer to all your financial woes? There is no doubt that a personal loan provides a good opportunity to organise your finances or improve your standard of living, whether it be with a shiny new car or a more reliable washing machine. But personal loans are usually more complicated than some lenders let on.
Firstly, the rate being dangled in front of you may not always be the one that comes your way. It is actually your own personal circumstances that will dictate your rate. How you go about applying for a loan, who you apply to, how much you want to borrow and for how long you want to borrow it are just some of the factors that have a huge effect on the amount you have to pay back. One big reason for taking a loan is to consolidate your debt and make life easier by having it all in one place – but this can also end up meaning the repayment term is extended.
Many loans offer a good way of organising your debt and making sure you pay off a fixed amount per month. But if you are not careful, you could end up paying a high price for choosing the wrong loan in the first place.
Making The Right Choice
Making it personal
If you want to borrow money but do not want to secure the loan against your other belongings, an unsecured personal loan is the way to go. Unsecured means you are not tied in by any guarantees, unlike a secured loan such as a mortgage, which is tied into your house.
Obviously, you are contractually obligated to repay the money and if you miss payments you could get a big black mark against your name.
In general, you can borrow from £500 to £25,000, which you pay back on a monthly basis over a period of six months to 15 years. However, an unsecured loan means more risk for the lender and in turn, makes them more wary about how much they lend and who they lend it to.
The most common personal loans are fixed, which means repayments are set at a certain amount over a set period of time. Variable loans are also available, although this means that your interest rate is dependent on the bank base rate and could fluctuate.
There are lots of loans out there and rates can vary from just under 6% right up to 20%, so by looking around for the best deal you could save yourself hundreds of pounds in interest. Taking out a loan also means you need to plan ahead.
If you want to borrow a lump sum of cash, you need to set out how much you can repay and over how many months. So, work out your monthly budget and think about how long you want to make repayments for. Obviously, the longer you take to pay it, the more the interest accumulates.
The last thing you want to do is agree to a long-term repayment scheme and then realise you can pay it back earlier than you thought, especially if the loan includes early repayment fees.
It may seem like a lot of effort, but getting a number of quotations and making sure you compare like-for-like loans will help you save money in the long-run.
TIP: Try to ensure you compare like-for-like loans.
TIP: See if you can negotiate with the lender for a better rate – if you don’t ask you don’t get!
TIP: Lenders may also charge an additional fee for instant or same-day electronic transfer, for example by CHAPS (Clearing House Automated Payment System). If you request normal delivery, of two or three days, e.g. BACS, you could avoid this fee.
Where to go
Most people like to talk things over with a real person before making a decision to borrow money – it is often more comforting to see a smiling face and get some advice. But going along to your local bank to sign up to a loan may be better business for them than it is for you. Loans that you can sign up for over the internet offer some of the best rates, but you do need to make sure you look at the details and the small print.
Take an interest in your loan
The Annual Percentage Rate (APR) is the rate you should be looking out for as it includes the overall rate of interest plus any other charges. But while a loan may have a very low “typical APR,” this does not always tell the whole story. Typical APR means that more than 66% of people who make a successful application are eligible for that rate – which leaves a large group who will be offered a higher rate or who may be refused if they do not make the grade. And making the grade is about various things, including your personal circumstances, how much you earn, and your credit history. So remember, the APR is likely to be matched to your risk level. Also, the APR may not tell you everything you need to know about your loan. You may want to check what charges and features are actually included in the APR you are being quoted.
TIP: Checking the APR is one thing, but you also need to make sure you check how much the monthly repayments are and how much the overall sum is that you are paying back. It is vital that you know this before you sign on the dotted line.
TIP: Also check out the penalties if you want to repay the loan early.
Know your history
When you borrow money without putting down any collateral, you are already seen as a bit of a risk by a lender. However, if you have had problems paying your debts in the past, you are likely to have a couple of black marks against your name. Defaults and County Court Judgements (CCJs), which may have been taken out against you if you have not paid debts in the past, are going to stand in the way. Certain groups, such as self-employed people, may also find it tougher to fit a lender’s criteria.
TIP: You should make sure that credit agencies, which keep track of your credit history, have got the correct information. Your application for a loan may well be affected by a credit agency.
Making Your Loan Work
Making life more simple – debt consolidation
There is nothing quite like seeing your bank balance back in the black and a credit card account in the clear. A loan offers a good way of making this happen by shifting all your debt into one place. This may mean transferring it across from several credit cards or an overdraft facility – both of which may be charging higher interest rates.
Several credit cards may mean you have bills flying at you from all angles and at different times of the month. Not only is it difficult to keep track of your outgoings, it may also be a right pain having to fill out all the payment slips. A personal loan could make life easier and more organised, especially with fixed direct debit payments that leave your account with little or no effort on your part. However, you need to make sure you go into a loan with your eyes wide open. By taking out a larger loan to cover your debts, you may be committing to a longer term of repayment, which adds up to more interest. More manageable monthly repayments may make you feel as though you have more cash, and you may even have a little extra in your account left over from your total loan amount. But it’s no good fooling yourself – debts don’t vanish into thin air and the lender certainly does not forget about them. Remember, you owe the same amount of money, if not more, when you consolidate your debt.
TIP: Once your other debts have been cleared, you need to make sure history does not repeat itself. Avoid maxing out your credit card again or you will end up in an even worse situation. Your best bet is to cut up your cards, speak to your bank about your overdraft and remove the temptation altogether.
Paying it back
You need to bear in mind that lenders are not offering you money out of the kindness of their hearts. Although many people manage to pay debts off early, you may actually be penalised for paying the money back quickly! Early Repayment Charges are put on loans so lenders get as much interest out of you as they can. By paying back a loan of less than £25,000 one year early, you may be forced to pay a penalty of one or two month’s interest. Flexible loans let you pay back different amounts of money at different times, but these often charge a higher rate of interest. Remember, if you do get into any difficulty, honesty is always the best policy. It will be much better for everyone if you face the problem head-on, because by ignoring it and letting it fester, you could be putting yourself and your family in serious trouble. The sooner you explain your situation to your lender, the sooner both parties can arrange the best way of getting things back on track.
Bear in mind, just because it is an unsecured loan, that does not stop lenders from going to court and making you pay one way or another. This could lead to a black mark against your name, such as CCJs. Also think about what will happen if you do miss a payment.
TIP: Be honest about your financial situation or you could find yourself in court.
Points of Reference
MoneyExpert.com was formed in May 2003 after a management buyout of Blays, the longest established provider of comparison data to the financial services industry. The organisation provides an up-to-the minute financial comparison service allowing customers to select from all suitable products from all relevant providers. It is partnered with the financial research company Defaqto whose customers include a number of banks and insurance companies as well as the FSA. MoneyExpert.com was rated one of the top 50 businesses to watch for in 2005 by Real Business magazine.
Alexander Cowen Wright, PR & Communications Manager, MoneyExpert – 01942 710979
MoneyExpert Limited is authorised and regulated by the FSA. Firm Reference Number 301654.