What is a personal loan
It's a sum of money you borrow from a financial institution eg
a bank or a building society.
How do they work?
You agree to borrow a sum for an agreed period (usually anything
from 6 months to 10 years plus).
Lenders make their money by charging you interest
on the loan.
The interest rate can be either fixed or
variable.
Fixed interest rate loans
This type of loan is where the level of interest
stays the same throughout the term of the loan - ie it's fixed.
(Doh!)
It's advantage is you know exactly what you'll have to pay back
each month. But the downside is that it'll be more expensive than
a variable interest rate loan.
Variable interest rate loan
This is where the interest rate varies, (doh!
doh!)
So the amount you may have to repay can change. Any change will
depend on the market conditions at the time. They're usually tied
in to the base rate.
Personal Loans are either secured or unsecured.
A Secured Loan means the money lent is secured
against something tangible eg your home or car.
If you default on the payments the lender can use whatever you've
secured against the loan to recoup their money.
Secured loans cost less and tend to be easier to arrange.
It's very unlikely you'll be "credit scored"
An Unsecured Loan is where you haven't put anything
up as collateral ie any property.
If you default on the loan, the lender hasn't got anything to grab
from you to recoup their losses.
This makes it riskier for the lender which is why they're more
expensive than secured loans and usually take a bit longer to arrange
while they umm and aar.
You'll definitely be "credit scored" for an
unsecured loan but this is a fairly quick process.
Click
here to see a list of recommended unsecured loan providers
Consumer Credit Act
This is the law that governs loans of up to £25,000.
It controls the amount that can be lent and how the loans can be
marketed processed, collected etc.
The Credit Agreement
This is the written agreement between you and the lender, which
you'll have to sign.
Always read the small print carefully and ask
any stupid questions you feel like.
If there's something you don't understand it's not your
problem it's the problem of the highly paid people who
are supposed to make it all crystal clear to us mere mortals.
How do you get a loan?
Before you leap, consider Do
you really need the loan?
Who provides loans?
What's the process?
Credit Checks
Apply through us
About Interest
What is interest?
The Interest Rate
The Headline Interest Rate
The APR
The Base Rate
What is interest?
When you borrow money the lender makes money by charging interest.
If you've borrowed £100 and the interest rate is 5% that
means you would be paying £5 in interest - so you'd have to
pay a total of £105 back.
The Interest Rate
This is the amount of interest you're charged and will affect what
you have to pay back.
For example; if you've borrowed £100 and the interest rate
is 5% that means you would be paying £5 in interest - so you'd
have to pay a total of £105 back.
The interest rate should always be refered to as an APR.
Even if it's termed as a monthly interest rate it should show the
APR it reflects.
The Headline Interest Rate
This is one of the tricks of the trade used by the lenders. The
headline interest rate is the one you'll see shouted about in the
adverts.
Ignore it.
Always compare loans by using the APR.
Showing the APR is a legal requirement. All lenders
must make it clear what the APR is on each of their loans.
If you're talking to a broker and you ask them what the APR is
on the loan they're offering you, make sure they're not avoiding
the question. They should refer clearly to the APR
and not simply "the interest rate".
APR
The APR (Annual Percentage Rate) is a way of leveling the playing
field by providing a true comparison between different loans. The
APR takes all the costs of the loan into account.
It was introduced by the government to prevent nasty hidden charges.
Otherwise charges could be hidden: while a monthly interest rate
may claim to be 1% the APR may be 15% ie more than 12 times the
monthly charge. This is because the APR has to include everything,
wheras the monthly rate can be used as - how shall we put it politely?
- more of a marketing tool.
Showing the APR is a legal requirement. All lenders
must make it clear what the APR is on each of their loans.
The lower the APR on a loan the better
because it means you have less interest to repay.
The Base Rate
The Bank of England sets a "base rate" which is treated as the
standard interest rate reference point. Basically it's that very
serious boring bit on the news you've probably ignored for years
when they talk about interest rates going up or down.
The lender's interest rate will be set at an agreed level higher
than the base rate.
So if the base rate is 5% and you're paying 3% above it (ie "3%
over base rate") you'll be paying 8% interest. (5% plus 3% = 8%).
If the Bank of England raise it by 1.5% overnight the base rate
is now 6.5%. Your variable rate loan would now be 9.5% ie still
3% above the base rate.
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