FAQ
Guide to loans
Personal loans may be used for many purposes. Everything from buying a car, to paying for a dream wedding or going on an all inclusive holiday trip. In some circumstances they may be used for home improvements and consolidating certain unsecured debts (like credit cards). This guide for loans is to help you understand exactly what type of loan best suits your needs the most, whether that's an unsecured loan for a rainy day or a secured loan comparison.
Types of loan
Two basic types of loan exist: secured and unsecured. Whilst these types of loan may vary greatly, the main difference being the level of money involved. But, the significant difference are the interest between the two loan types, for instance unsecured loan rates (e.g. credit cards or payday loans) can be higher.
What are unsecured loans?
One of the most common loan types are unsecured loans. These will include credit cards, bank overdrafts, payday loans and store cards. 'Unsecured' effectively means these loans will not put any your property you own at risk, i.e. no security or collateral is required to be back up the loan with something of value.
What are secured loans?
In comparison, secured loans, are typically for a bigger sums, having specific loan terms, and requiring some security, e.g. property. So, if you default (i.e. keep missing your repayments) on a secured loan you will place your home at risk.
Loan interest rates
The rate which you will are charged for personal loans depend upon the size of your loan, the term, id there is an existing lender relationship and also your creditworthiness. It's essential you understand exactly how the credit scoring agencies work and how if you have a lengthy poor credit history of unpaid debt it will very likely damage your credit rating and therefore ensure any borrowing you need will be much harder and more expensive.
If you are looking for personal loans, remember the advertised interest rates are the representative rates which are offered by lenders only to a certain percentage of borrowers, so may not be the actual rate you will be offered. The interest rates which are advertised usually only available to those with a higher credit score.
How to get the best loan interest rates
Once you understand what types of loan are available, you'll need to choose precisely how much you need to borrow and over what duration. Most lenders will have tiered interest rates, which may mean you receive lower interest rates if you borrow more. Another consideration is the duration or term of the loans, as this may effect interest rates which you're charged.
Having lower interest rates for higher borrowed sums does not mean you need to borrow more than you require, it just means you should be made aware that taking out a loan of £5000 might mean paying a lower rate compared to if you were to borrow a slightly lower amount, for instance £4,900. In typical circumstances, lowest loan interest rates apply only for loans between £7,500 - £10,000.
Loan terms (or loan duration)
You'll find that different lenders will offer different terms for unsecured loans, and typical terms can range from 1 -7 years (though in exceptional cases, some companies may offer just 1 month, or up to a maximum of 10 years). From the start, you need to decide the term or period during which the loan needs to be repaid but you need to remember that for personal loans there may be early repayment charges if you choose to pay off the loan early. Also, there could be restrictions on loan term lengths, e.g., if you're approaching retirement age, you may qualify for only a shorter term.
The lenders decision on granting you a loan is based on a number of criteria, like your credit score, your existing debts and your ability to make repayments on the loan given any other financial commitments you may have.
Personal loans will make most sense for those who need to repay off all their debt over several years. If you simply need want to pay a purchase off within a 6 month time-frame, then buying with a credit card or using a (bank) overdraft facility may even work out being cheaper.
Payment protection insurance (PPI)
PPI is the name given to a type of policy which covers your loan (e.g. credit card) repayments if you have fallen into financial difficulties due to sickness, accident or unemployment. It's also sometimes referred to as accident sickness and unemployment cover (or ASU for short).
New financial regulations mean from April 2012, lenders will not be able to sell you PPI (payment protection insurance) when a customer applies for a loan, but are allowed to do so shortly afterwards.
If you really do need PPI, it is well worth shopping around for a policy which best suits your requirements in terms of cost and coverage. It's also worth checking how long your employer (if you have one) will cover your payments if there is ever an emergency, or if your PPI provider's policy would cover you in the way you want.
If I'm refused a loan, what does this mean?
Typically, lenders will run credit checks on any potential borrowers, as well as checking against their own in-house and other records. If you're refused a loan, it's quite possible you have a low credit rating.
It's also well worth remembering different lenders will have different scoring systems and lending criteria, so if you are rejected by one lender then applying to another lender may well prove to be successful. Loan refusals can even be down to something which may seem trivial like recent address changes or your employment status.
It's best to avoid applying for too many loans as details of your application may well appear on your credit file even if you have been refused or if you don't proceed with your loan.
Getting a loan may seem like a big step, and not really one which should be taken lightly, but by reading our loans guide it should give you a clear insight into the benefits and risks involved.
7Top tips when seeking out a loan
- Before talking to anyone, you need to work out exactly how much money you need and the duration you wish to pay it back. Remember, for shorter term loans, you can save money.
- Take note of the loan terms and interest rates, as if you borrow slightly more it may well reduce any interest rate you need to pay.
- Think about an overdraft or a credit card for short term loans, e.g. under six months. Different loan types suit different needs.
- Think about if PPI is appropriate for your needs, and simply don't get it if you have no real need for it.
- Do not panic if you're application is refused. Try and find out the reasons why.
- Many building societies and banks offer better rates to their existing customers. Approach your own building society or bank when you choose a loan so you can see if it really has a competitive loan that is available.
- Supermarkets are now quite prominent in the personal loans sector, and may well offer competitive rates as well as providing other incentives such as reward points.
Lastly, if you are happy to apply for personal loans online or by phone, then you may be bale to get lower interest rates than if visiting your local building society or bank branch.
It's really important you get the right loan, as making the wrong choice may end up costing you more money. Following the advice in this loan guide you should be well on your way to finding a loan which meets your requirements.