Loans explained: all you need to know

We have brought together all you could ever need to know about loans in this one-stop-shop guide.

• What types of loans are available? – You can have a personal loan, secured, debt consolidation
• Where can you get loans in the UK? – You can get a loan online, from a bank or even in a supermarket
• What do I need to think about when choosing a loan? – whether you can afford it and how it will affect your credit score
• What is meant by a typical APR? – the APR that most customers will be given after applying for this loan
• What’s involved in applying for a loan? – you will need to provide details and your credit score will be checked
• How does the Consumer Credit Act protect me? – you have to be clearly shown the whole cost of the loan upfront

Loans can be complicated products to understand, but getting the right loan for your situation is crucial.

What types of loans are available?

There are a variety of types of loan to consider. To find the right loan for you, it’s a good idea to get a sense of what’s available:

Personal Loans – Personal loans, also known as unsecured loans, are loans where your borrowing is based on your personal credit rating. You can borrow up to £25,000 and the maximum amount of time for repaying the loan is 10 years.

Secured Loans – With secured loans you have to use your property as security against the loan. This means that if you default on your repayment, you could lose your home. You can borrow up to £100,000 and the maximum amount of time for repaying the loan is 25 years.

Debt Consolidation Loans – A debt consolidation loan simply means you move all your debts to one account or loan. For example, if you had some credit card debts and an overdraft, you could take out a loan and use this to pay back all your debts.

The idea behind these loans is that they allow you to simplify your finances and will probably cut your interest payments.

Where can you get loans in the UK?

There are variety of different places to get loans from, including:

• high-street banks and building societies
• internet loan providers
• supermarkets and high-street stores
• secured loan providers

You just need to find the loan provider that provides the best deal for you and your circumstances.

What do I need to think about when choosing a loan?

Before choosing your loan it’s important to consider the following factors:

• Don’t borrow beyond your means – make sure you can afford the repayments.
• Check the APR (Annual Percentage Rate) being charged on the loan.
• Find out if you will have to pay an arrangement fee to set up your loan.
• Check if there is an early repayment penalty (also known as a redemption fee) if you pay back the loan before the end of the loan term.
• Make sure you’re aware of any loan payment deferments or breaks available.

You can compare the lifetime cost of loans, monthly repayments and APR with our loans calculator.  Simply enter the amount you want to borrow and how long you want to take to repay the loan.

What is meant by a typical APR?

APR (Annual Percentage Rate) is the headline interest rate figure lenders quote when advertising a personal loan.

This is not as straightforward as it sounds, however, because although a lender may quote an Annual Percentage Rate, which is the amount the loan will end up costing you including interest and charges, you may actually end up paying more or less than that rate.

Why? Because many lenders calculate the APR of a personal loan using a system called risk-based pricing. This means that they assess each individual’s circumstances and credit history before deciding what interest rate to offer them.

Although a lender has to offer the headline rate to 50% of people who successfully apply, it’s possible that you won’t get this rate.

What’s involved in applying for a loan?

Loan companies have to assess how likely you are to be able to repay your loan. So as well as asking for details from you, such as your address and bank details, they will often perform a credit check on you.

They do this by contacting credit reference agencies that hold information on such things as whether you have missed any bill payments, made any late payments or had any County Court Judgments recorded against you. You can check your credit report with Experian.

What are early repayment penalties?

Some loan providers penalise you if you try to repay your loan early. An early repayment penalty could be the equivalent of 1 or 2 month’s interest. Generally, the earlier in the term you repay your personal loan, the higher the charge.

However, not all loan companies do this, so if you think you might be able to repay your loan before the end of its term, shop around for a loan that doesn’t apply early repayment penalties.

How does the Consumer Credit Act protect me?

Firms lending money to customers have to be licensed by the Office of Fair Trading (OFT) under The Consumer Credit Act 1974.

The Act also requires that you are given full written details of the true interest rate (i.e. the APR) and in certain situations, you get a cooling-off period during which you can decide to change your mind and cancel the loan agreement

Glossary

• Adverse credit rating. This is the term used for people who have a poor credit rating or history. This may be because they have bad debts, mortgage arrears or a County Court Judgment against them.
• APR. This stands for Annual Percentage Rate. This is the overall cost of borrowing if you owe money on your loan.
• Arrangement fee. This is a fee some lenders charge for arranging your loan.
• Credit reference agencies. Credit reference agencies keep account of your credit history. They pass this information onto financial institutions when you apply for a loan or some other form of credit.
• Debt consolidation loan. This kind of loan is designed to help you simplify your finances by moving all your debts from credit cards, overdrafts and so on into one large loan.
• Early repayment penalty. This is a charge made if you pay off your loan early (ie before the official end of the term).
• Loan payment deferment. This is where a loan company allows you to have a break from paying back your loan. It is sometimes known as a payment holiday.
• Payment protection insurance. An insurance policy that can pay an agreed amount if you’re unable to earn because of illness, an accident or redundancy. This can therefore help to keep up your payments to your lender.
• Personal loan. When you take out an unsecured or personal loan, you are not offering any security such as your house. Personal loans are given on the basis of your credit rating.
• Secured loan. This is a loan that gives the lender a claim on your home, in the event of you defaulting or failing to pay back the loan.
• Representative APR. This is the APR a lender will offer the majority of borrowers (though not all). The representative APR will be offered to 50% of borrowers. This means that once a lender checks out your circumstances, you might not qualify for the representative APR.

Read more…

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• Credit Card Guide Everything you always wanted to know about credit cards but were afraid to ask
• Credit Unions Banks and payday lenders aren’t the only places you can get a loan