Getting the Right Personal Loan
Before you take out a loan, it is important that you understand the different types available and work out which is the right loan for you.
There are basically two types of loans, secured and unsecured. This guide takes you through the options.
In order to take out a secured loan, you have to be able to provide the lender with some form of security, and in this case that security is property.
It doesn't matter whether you own the property outright or have a mortgage, the lender will secure the loan against your property. Simply put, this means that should you default on your loan, the value of your home will cover the cost when sold. You have to be aware of this before you agree to taking out a secured loan because if you do default on your repayments, your home could be repossessed. If your home is mortgaged, a secured loan is referred to as a second charge and loans secured against a property that is owned outright are called first charges.
Secured loans range in size, usually between £3,000 and £50,000, and can be used for many different purposes, from debt consolidation to completing those much-needed home improvements.
The repayment term of the loan and how much you need to borrow is agreed with the lender at the outset. Make sure at this stage you are clear on all the possible charges you will incur, that goes for the future too.
For example, if you should be in the position where you can repay the loan earlier than the agreed term, the lender may charge you a hefty fee.
It is also important to shop around before deciding on which lender to apply to. When comparing products, look specifically at the Annual Percentage Rate (APR). This is the rate of interest charged by the lender on the amount you borrow and is usually dependent on the amount of equity you have in your property, your ability to repay the loan and your current circumstances.
Be very careful when looking at APR's because in the comparison stage they are given as a guide and the actual interest rate given to you is calculated on an individual basis.
Applying for a Secured Loan
Applying for a secured loan is very simple, it can be done at your local bank or building society branch, over the telephone, through a posted application or online.
There are many comparison sites that allow you to link directly through to the online application form. Be aware when you do this that the company at the top of the table may not be the best as some of these comparison websites work on a commission basis. When assessing your application, the lender will look into your credit history.
This is where your credit report plays a part. Instead of you having to relay all of your past and present financial commitments every time you apply for a credit card or a loan, your information is held in a central database by two leading credit reference agencies, Experian and Equifax.
When considering whether to lend to you, the lender will search through your credit history, looking for any defaults, CCJs or anything that would make you a risk to lend to.
Each lender has their own criteria that they use to give a potential borrower a credit score. This score is made up of a combination of your credit history and the information you provided on your application form.
If you have a good credit score you will find that you are able to get better deals on financial products and have access to lower interest rates than if you have a bad credit score.
Unsecured loans, sometimes referred to as 'personal loans', are often the preferred option to people who need to borrow smaller sums of money and who wish to pay back the loan within a shorter period of time.
They can be used to fund virtually anything and will often be used to buy a new car, to pay for a family holiday or maybe to help fund your child through college or help go towards the cost of childcare and nursery fees when your offspring are younger.
One of the main advantages to the borrower is that, because the loan is unsecured, you are not usually at risk of losing your home if you find that you cannot meet your repayments during the term of the loan.
Because the loan is unsecured, this obviously presents more risk to the lender who, in effect, is taking you at your word that you're going to able to repay the money.
However, the truth is a little more complicated than that as lenders will always have access to our credit history.
Here, they will be able to check out how we have conducted ourselves with regards to any other loan or credit agreements we've had in the past.
>They can find out how much we earn or what our income is and can generally determine if we are likely to be able to meet the repayment terms of any new loan we might wish to apply for. Therefore, lenders are able to turn down many loan applications if they feel that a person is going to struggle to make the repayments.
Usually, this will be because our credit record holds information such as any defaults we've had on previous credit agreements, any arrears we may have incurred and any CCJs we may have been issued with.
However, even if we have passed the stringent criteria for obtaining an unsecured loan, it certainly doesn't mean that if we're unable to repay it, then we've got off 'scot free' with the money.
On the contrary, lenders can take us to court and we are still liable for any debt which we've incurred and we still have an obligation to repay the money.
Lenders make most of their money from the interest that they charge consumers. Therefore, as the total amount of money which can be borrowed (usually anything up to around £10,000 with an unsecured loan - although it can be higher), alongside the fact that we'd usually be asked to repay it within 10 years at the most, then they are a popular choice for consumers as the amount of interest the banks are able to make from us tends to be smaller.
Borrowers also need to be aware, however, that interest rates tend to be slightly higher than with unsecured loans to reflect the greater risk to the lender.
And, whilst, unsecured loans tend to be made available to those of good financial standing, there are numerous lenders who will still make an unsecured loan available to someone who has a bad credit history, in certain circumstances.
Don't forget too that the 'typical' APR rate that may 'lure' you in, is only a guideline. The 'typical' rate means the APR which they are able to offer the majority of their customers.
Usually, that means around two-thirds of all applicants will receive their advertised rate but this also means that around 1 in every 3 people won't so don't be fooled by the attraction of the rate as there's no guarantee you will be eligible to receive it.