Personal Loan Guide
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Moneynet.co.uk – Personal Loan Guide
Introduction: Personal loans – more choice than ever before
TIME was when we had little choice if we needed to arrange a loan. The first port of call was typically the High Street bank, or local building or friendly society. We would then have to rely upon the benevolence of the manager – and of course a decent credit record showing that we were a good risk when it came to repaying money borrowed. The amounts we could borrow were restricted, and even up to just a decade or so ago, going cap in hand for sums above £10,000 was virtually unheard of. Today however the situation is radically different. As a nation we collectively owe in the region of one trillion pounds – yes, one trillion – comprised for the most part of mortgage, credit/store cards and personal loans. One of the reasons for this massive uplift in debt is the easy availability of money. Whereas we used to be limited to the High Street when wanting to borrow significant sums to buy a car, say, or maybe to help finance other major projects, in 2005 there are endless avenues open to us. Along with the High Street lenders – some of whom offer the most competitive rates available in today’s fiercely competitive market – we can now log onto the Internet to source a personal loan, or pick up the telephone to arrange an in-principle loan via a finance company in a matter of minutes. As a financial data comparison site, Moneynet.co.uk can point you in the right direction for the best deals to meet your needs. There is a bewildering choice, and not all of them will be right for you. For example, some loans impose hefty penalties should you want to pay them off earlier than the agreed borrowing period. The golden rule is always to read the small print before signing for a loan.
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How much should I borrow and over how long?
Most people typically clear their loans on a regular monthly basis, taking from anywhere between one and five years. For sums of between £1,000 and £25,000, the personal loan is these days typically the first port of call for millions of people needing a bit extra – many borrowers will use their loans to consolidate other, more expensive debts such as outstanding credit card balances and bank overdrafts – but of course millions use them for major purchases such as motor cars. As a general rule of thumb, the more you borrow, the cheaper the rates of interest. So if you want say, £1,000, you could be looking at rates as high as 20 per cent – the lenders say this is because of the relatively high administration costs involved in arranging loans. Sums of this size are often better put on a low cost credit card, or run as a bank overdraft. But for the bigger sums, many will opt for a personal loan. Borrow £25,000, spread over say a five year period, and you could be looking at rates of under six per cent. With the Bank of England base rate still at historic lows, this represents very cheap borrowing. Another consideration is whether or not to take out insurance – known as payment protection insurance – which covers your loan repayments in the event of your not being able to work through accident, sickness or unemployment. But this kind of cover can significantly drive up the cost of the loan repayments, and there are often many clauses in the small print which can trip you up. If you are self-employed, or on short term working contracts for example, you may find that the terms and conditions of the loan are not appropriate for your circumstances.
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Secured or unsecured: which kind of loan is best for me?
Secured or unsecured are the two options available to most people, although by far and away most people arrange their personal loans on an unsecured basis. Secured loans are – as the name suggests – arranged on the assumption that the borrower is going to put up some kind of surety to the lender. Generally this is the borrower’s property. This means that the lender has the right to take ownership of the asset if you fail to make the repayments that are due under your loan agreement. While most of us would baulk at the prospect of putting our homes on the line, there are advantages to taking out a secured loan. For example, the lender's risk of default is reduced, which usually means a lower interest rate or perhaps a longer repayment period. One of the key differences between secured and unsecured loans is that it is usually possible to borrow far more by going down the secured route. Lenders will consider much higher sums if they know they have a security over your property and it is possible to arrange up to £100,000 – but you’ll typically need to put the deeds to your home on the table. The amount borrowed is repaid monthly over an agreed term agreed at the outset, which will usually range between three years and twenty five years. You may be charged a penalty if you repay your loan earlier than agreed, and you should check each lender’s individual policy. But the key issue here is that, when you see that bleak warning notice ‘Your home is at risk if you fail to keep up with repayments’, it really does mean that. Consider therefore the risk of losing the asset, were you to fall into arrears with the required repayments, against the advantage of paying slightly lower regular payments. It will probably come as no surprise to learn that around 90 per cent of all loans arranged fall into the unsecured category. Put simply, you do not have to put up any security for the loan, and the lender trusts in you and your ability to repay the debt. The rates of interest charged are normally higher or the maximum loan terms are significantly shorter than those available for secured loans, but even so, five years – or 60 months – is usually long enough to cater for most borrower’s needs. And if you are able to arrange a loan at less than 6 per cent, then you can see why levels of personal borrowing are today higher than at any time previously – even during the consumer boom of the late Eighties. Most people will prefer to take out a fixed interest rate, which effectively means it will stay the same throughout the term of the loan, regardless of any changes in the bank base rate.
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In much the same way as arranging a fixed rate mortgage allows you to determine your monthly repayments, allowing you to budget accurately, so does the fixed rate personal loan. But go for a variable interest rate, and you will find your repayments will rise and fall in line with any changes to the bank base rate. Although lowest APR is one factor that contributes to a ‘cheap’ loan, you should always pay attention to the small print as any additional costs will be found there. Remember also that if your credit rating is not as good as it might be, lenders will see you as a higher risk and may not offer you the lowest APR on their personal loan products. That said, do not be too thrown if you have to pay a slightly higher APR. The difference between one or two per cent on repayments spread over three years is very little in the overall scheme of things. Some lenders do apply an early settlement charge (also known as a redemption penalty) if the debt is repaid in full before the agreed end date. This can be up to 2 months interest so it pays to check this out before you commit. If you think you'll clear the debt before the end of the term then your best bet will probably be a loan with no early settlement costs, even if the APR is slightly higher. Whatever you decide, you’ll need to do your sums before you sign on the dotted line.
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What are the pitfalls in arranging a personal loan?
Banks and building societies and other lending institutions are keen to compete for our business because there is big money to be made from personal loans. When we borrow money, be it on a mortgage or credit card or bank overdraft, the lender makes profit from the interest charged. The interest rate applied is known as the Annual Percentage Rate (APR), and your first consideration when arranging a loan is to compare the APRs of different products as a means of determining how competitive they really are. If it’s presented as a monthly rate of interest, look for the annual equivalent, which will allow you to compare it with other lenders. There’s a wide variation in the rates available - and there’s nothing to be gained by paying any more than is necessary. So don’t think that just because your own bank or other lender says it has a special offer for customers this is going to be the best available. There's nothing to stop you going elsewhere - and there's every reason to shop around as widely as possible. When you’re looking at interest rates, it’s also important to consider any other factors that might be making them cheaper. For instance, a 'secured' loan might have a lower interest rate but it will represent a much higher risk, because if you default on repayments you could lose your home. It is not unusual for lenders to offer different APRs depending on the method of application e.g. applications by telephone may receive a higher APR than those done online, so it’s well worth shopping around for the best deal. If you are looking for a low cost loan, comparing the APR is always a good place to start. Lenders do quote interest rates in different ways, and it's worth familiarizing yourself with these before you start. If your loan is a truly flexible product then you may also be able to withdraw funds from the account on a rolling basis, providing you stay within your credit limit. Lenders also offer repayment holidays or payment breaks, allowing you to take a break from your monthly repayments either at the start of the loan (known as 'deferred repayment') or at an agreed point during the term. Interest will continue to accrue on the outstanding balance and this may result in increased monthly payments so your debt is still repaid over the term agreed at the outset.
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Am I protected by law when I take out a personal loan?
Personal loans – both secured and unsecured - are governed by the Consumer Credit Act 1974. The Act contains strict regulations about how money is lent and covers unsecured loans up to £25,000 (these are known as 'regulated loans'). When taking out a personal loan you will be asked to sign a credit agreement, and you'll be bound by its terms. If you get into difficulties when repaying your loan, be sure to tell the lender promptly. It will usually be possible to arrange a different loan repayment schedule, although there may be additional penalties for this facility. But the very worst thing is to do nothing. Remember, if you miss monthly repayments this will ultimately affect your credit record. And an impaired credit history can be a nightmare to sort out.
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Should I take out insurance to cover my personal loan repayments?
If you’re weighing up the possible benefits of insurance, there are a number of aspects to consider. Make sure that the insurance being offered is appropriate to your particular needs. Many policies will have regulations stating that you can’t claim for up to 60 days after losing your job or getting sick. There can also be clauses stating that you lose any benefits if you work for even a single day, so any temporary work you do to pick up some extra money will render your insurance useless. Reading the small print on a loan contract is particularly important if you're self-employed or on a fixed-term contract. On close inspection, you might find that you’re not covered if your self-employed work dries up or your employment contract isn’t renewed. You might even find that you're not covered if you fall ill and are unable to work. Banks won’t tell you this when you sign on the dotted line. But they'll have no problems telling you when you come to make a claim.
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What is best for me – a personal loan or a mortgage?
The more you borrow, the lower the rate of interest. And at the top end of the borrowing scale, personal loans are competing with mortgages, which usually have a lower interest rate. While personal loans typically have rates between around 6 per cent and 18 per cent, it’s possible to find a fixed rate mortgage at 5 per cent. If you’re borrowing £15,000 for some major work on the house, it’s worth thinking very carefully whether it would be cheaper to get a mortgage than a personal loan. Mortgage lenders are more than ready to extend existing mortgages or to tempt customers over from other lenders, particularly when increases in property prices have left many people with large amounts of equity in their home. You can arrange an extended mortgage over a period similar to a personal loan, and the repayments, like loans, are structured to pay off the debt at a fixed time. But beware. Borrowers always have to be aware of the risk of losing their home if they can’t keep up with the bigger monthly repayments.
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Credit checking and scoring – what does it mean for me?
Lenders want to make sure that you are a good risk and do not have a history of bad debts and unpaid loans behind you. To do this they will check your entry on credit registers. Credit reference agencies such as Experian, Equifax and CallCredit PLC hold factual information about you and this allows a lender to check your name & address and your past credit history, including any County Court Judgements or defaults recorded against you. A poor credit record won't necessarily prevent you from getting a loan, but you will probably have to pay a higher interest rate. The self employed, or those – increasingly common these days - on short-term contracts may not be such an attractive risk to lenders. People are refused credit for a number of different reasons and there is no automatic ‘right’ to credit, although it is illegal to refuse credit for reasons such as race, gender, religion, sexual orientation or address. A common reason however for being turned down for credit may be because information held about you by a credit reference agency, or information provided in your application form, suggests that you will have problems repaying.
Credit referencing and credit scoring: how it works
Most lenders go through three main credit reference agencies for information Experian on your financial past – Equifax (www.equifax.co.uk), (www.experian.co.uk) and CallCredit PLC (http://www.callcredit.plc.uk). These three agencies, although business rivals, work pretty much along the same principles. Each compiles credit histories from a number of different sources, including the electoral roll, county court judgements and how effectively past debts have been paid. Every time you open a new form of credit it will leave an electronic foot print on your record, which the agencies use to compile a credit ‘scoring’ system. When you apply for a personal loan, the lender – be it a bank, building society or whatever – will firstly run a credit check on you to see what kind of ‘score’ you have. If you are turned down for credit, this is not a decision made by Experian, Equifax or CallCredit PLC, but by the lenders, based on their own criteria. If you want a copy of your own credit report, both firms will oblige. Experian for example has a low cost credit report order-line: (0870 241 6212). You will need to have handy your name, date of birth, current address, any previous addresses over the last six years handy, plus a credit card or debit card in your own name. The
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fee for ordering a credit report by phone is £2.50. Reports should be sent out within 7 days. For a more instant look at your credit history, Equifax offers an online service, for which it charges £11.50, or its postal service if preferred costs £8.25 for a report. If a lender refuses you credit, it must say why. Under the Data Protection Act, if you are refused credit, and scoring was used to help the lender decide, you can ask for a review of your application.
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What if the records held by the reference agencies are incorrect?
It is possible for incorrect or outdated information to appear on your credit report. If it does, it can affect your chances of getting the loans, credit cards, and other credit products. If you find an error, take the following steps to correct the information as soon as possible. It's important to keep a record of everything you do. If sending via post, send all correspondences return receipt requested, and make copies of any letters or documents you send. Never send original documents. In the first instance, you should contact the appropriate creditor or lender before contacting a credit reference agency. Most large creditors have standard procedures for customers to dispute items on their account. If you have proof that the item in question is incorrect, it should be resolved quickly. If the creditor finds that the disputed information is indeed incorrect, the creditor is required to update its records both internally and with the credit reference agencies it deals with, usually within 28 days. Always follow up your phone calls with a letter. List each disputed item, and state how it is inaccurate, attaching copies of all relevant documents. Include your full name, account number, the amount in question, and the reason you believe the item is wrong. If you cannot resolve the problem with the lender, contact the credit reference agency that is reporting the item in question. You will need a printed copy of your credit report from them. After you send written documentation of the inaccuracy, the credit reference agency will review it. If further investigation is required, they will provide notification of your dispute, including the relevant information you submitted, to the source that supplied the disputed information to them. The source will then review the information, conduct their own investigation, and report back. The credit reference agency will then make all appropriate changes to your credit file based on the investigation, and notify you of the update.
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How can I improve my credit rating?
Make sure all your payments to creditors are made on time. If you are forced to miss a payment, make sure you tell the creditor and the payment is made the following month. Also, simple measures such as making sure you are on the electoral role or filling out credit application forms correctly will help boost your rating. You should also buy your credit history from the ratings agencies and make everything is correct and up to date. For example, if you have paid a county court judgement, make sure it is shown on the file. If a bankruptcy order is annulled ensure a copy of the order of discharge or annulment is distributed to credit agencies. Lenders can also search your credit report more than once during a single application and if this occurs you should again alert credit reference agencies. Reference agencies also allow people to explain why they may have had a period of poor credit performance. You can also attach a 'notice of correction' on their report explaining why they missed payments. Your credit history is a valuable asset because it allows you to take advantage of the competition between lenders - meaning you can shop around for the best rates or terms on the market. Each different lender takes a number of different factors into consideration when deciding to offer a customer a credit facility such as a loan, a credit card or a hire purchase agreement. You should also try and avoid multiple applications for credit within a short period of time. Comparing the best products on the market will not result in credit searches being registered against your name, however as soon as you submit an application to a lender a search will be registered as part of the application process. If there is financial information on your credit report linked to other people's names and you have no financial connection with those people you can ask the credit reference agency to remove the information from your report. This is useful where the information held could affect your own credit worthiness.
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Useful information:
Equifax Credit File Advice Centre, P.O. Box 1140, Bradford, BD1 5US 0870 010 2091, www.equifax.co.uk Experian Consumer Help Service, PO Box 8000, Nottingham, NG80 7WF 0870 241 6212, www.experian.co.uk Callcredit PLC Consumer Services Team, PO Box 491, Leeds, LS3 1WZ Tel: 0870 060 1414, http://www.callcredit.plc.uk
Moneynet links to the very best personal loan rates in the UK
AS the UK’s premiere financial data comparison site, Moneynet.co.uk can point you in the right direction when it comes to finding the very best personal loan for your circumstances. Having read our guide to personal loans, you will now be in a far better position to determine whether you want a secured or unsecured loan, for example. Remember, the vast majority of borrowers take the unsecured option – this way they do not have to put up their home as security for the loan. Interest rates might be slightly higher than for a secured loan, but at least you’ll be able to sleep easy at night. You should also budget accordingly for how much you want to borrow – and balance it against how much you can afford to repay every month. Don’t forget, a personal loan is usually agreed to be repaid over a set number of months – and that means month in, month out, you will have to find significant sums on top of your normal monthly outgoings. But for the very best – and lowest cost – deals around, visit Moneynet.co.uk pick of the personal loans selection.
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