Essentials of Borrowing
Personal loan fact sheet
Types of loans There are two main types of personal loans: secured and unsecured. Unsecured loans are not tied to any of your assets, but secured loans are - usually to your property, which is why they are often called homeowner loans. If you default on a secured loan, your lender can force you to sell the asset to pay off your debt. Car loans are also secured loans, with the lender using the vehicle you are buying as security for the loan. Homeowner loans are tied to a property. Photograph: Frank Baron Most lenders offer unsecured loans of between £5,000 and £25,000, although some cap borrowing at £15,000.
Smaller loans are available if you shop around, but if your borrowing requirement runs into hundreds of pounds rather than thousands there may be better ways to borrow the money. If you want to borrow more than £25,000, you will need a secured loan. You will also need enough equity in your property to secure the loan. Interest rates The APR (annual percentage rate) on a loan is the amount you will pay in interest each year. Most adverts for loans tend to quote a “typical APR”; you will not necessarily get the same rate of interest when you apply.
Unless you choose a lender with a “one-size-fits-all” interest rate, factors including how much you want to borrow, how long you want to borrow it for and your personal and financial circumstances will all have an influence on how much you pay. A bank has to have offered its typical APR (or a better rate) to at least 66% of potential customers. Interest rates can be fixed or variable, and it is important to know which you are signing up for. A fixed rate will remain the same for the term of the loan, which means your monthly repayments will remain the same. A variable rate will be subject to change, usually in line with the Bank of England base rate. While this is good news when rates are falling, it can be worrying if rates go up and you need to find more money than expected to make your repayments. Repaying your loan Most loans are repaid in monthly instalments & usually by direct debit - over a period agreed before you get the money. The lender will tell you how much you need to pay each month when it agrees the loan. The repayment period is usually fixed and you will have to pay a redemption penalty - for example, two months’ interest - if you want to pay it off sooner. The longer the repayment period, the more interest you will be paying, so go for the shortest you can manage.
Flexible loans, which let you borrow and pay back at will, are becoming more common, but the interest rate charged is often significantly higher. If you miss a payment the lender will record the default on your credit file. Any new lender may not be put off by one or two missed payments, but if you have missed several you may struggle to get credit elsewhere. Where to get a loan The list of organisations offering loans is long and ranges from high street banks, to those that operate only on the internet or telephone, to building societies, credit unions, specialist loan companies and even doorstep lenders. Typically, cheaper deals are offered by the specialists and internet banks than are available on the high street, but this is not always the case so you should shop around, either online or by contacting lenders to get quotes. Some Doorstep loans have interest rates as high as 900%. Photograph: Garry Weaser Possibly the most expensive form of credit is offered by doorstep lenders. Unlike mainstream lenders, they will often offer sums of less than £50 - typically used to cover unexpected purchases - and collect payments weekly. However, APRs can be as high as 900% so borrowers who have a choice will tend to avoid them. Credit unions are an alternative to mainstream lenders and can be an attractive option for some borrowers because they cannot charge more than 2% a month on the reducing balance of the loan (an APR of 26.
8%), and most charge just 1% a month (12.7% APR). Most credit unions offer unsecured loans for up to five years and secured loans for up to 10 years. Getting into difficulty Sometimes things go wrong and it is difficult to meet your monthly repayments. If this happens to you, do not ignore letters arriving through your front door. The best course of action is to get in touch with your lender immediately. Banks and building societies are often willing to help and might offer to freeze the loan temporarily or extend the repayment period. Their ultimate aim is to recoup their money, but it is usually more advantageous, including cheaper, for them to reschedule your repayments than to take action against you. It is particularly important to be upfront with your lender if you have a loan secured on your house or another asset, because if things go wrong you may have to sell up to pay back the loan.
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Essentials of Borrowing