Personal Loan Advice
A personal loan is what it says: a loan for you to spend as you wish. It could be
for a car, home improvements, or even to pay off credit card bills in one go, allowing
you to spread the repayments over a longer time at a lower interest rate. Here are
the key issues to consider when choosing which loan to take out.
Borrowing limits
- You can generally get up to £15,000 - but some lenders offer up to £25,000. You
can often get approval in principle over the phone with the money available in just
a few days.
Loan terms
- Some lenders will give you a loan for as short a period as six months, although
a year is more common. The maximum length is usually seven years, although some
firms will lend over ten. Personal loans make the most sense for people who want
to repay something over a few years. If you only need the money over six months
using your credit card probably makes more sense.
Providers
- Banks, building societies and, increasingly, supermarket chains offer personal loans
at competitive rates. Avoid loans from small firms that you have never heard of
- this is a lightly regulated area and some of these loans can carry high interest
rates coupled with heavy redemption penalties should you decide to move your loan
to a cheaper firm. Reputable firms generally charge penalties of no more than two
months' interest if you pay off the loan early. Shop around - your mortgage lender
may offer you a preferential rate, for example, but you might still be better going
elsewhere.
Interest
- Rates are generally fixed for the duration of the loan, which means you know exactly
how much you will repay each month. The disadvantage is that you could be paying
more than borrowers who take out a similar loan in six months' time - on the other
hand you could pay less. Either way, you do not have to worry about your repayments
soaring. Many lenders will insist that you take out a direct debit for the repayments.
Generally, the interest rate falls if you take out a larger loan. The crucial rate
to look for is the APR - annual percentage rate - which includes the effect of any
arrangement fees you have to pay, although few lenders actually charge these today.
Credit checks
- 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. A poor credit record won't necessarily prevent you from getting
a loan, but you will probably have to pay a higher interest rate. You may find it
harder to get a loan if you are self-employed or are on a short-term contract.
Unsecured loans
- Unlike a mortgage, this type of loan is not secured on your home. If you fail to
repay the loan, the lender cannot repossess your home. That is why the interest
rate is higher than for a mortgage.
Insurance
- Loan protection insurance is offered with many loans. This covers your loan if you
are unable to meet the payments because of unemployment or ill health. Think carefully
whether you really need this cover or not. It is often expensive, and if your financial
situation is precarious, should you be borrowing even more money? Some lenders make
buying this insurance compulsory unless you are prepared to pay a higher interest
rate. If you do want the insurance, ask about exclusions and small print which could
make it hard for you to claim. Some lenders do not show the cost of the insurance
in the monthly interest rate you are quoted. However, following a long-overdue change,
lenders must now show the whole cost including the insurance in their APR. This
makes a comparison based on the interest rate much easier and gives you some idea
of the real cost of the loan plus insurance.
