A Complete Guide to UK Loans
What
is a personal loan?
How do loans work?
Secured
Personal Loans
Unsecured Loans
Fixed
interest rate loans
Variable interest
rate loans
Where
to go for a loan
What's the process?
Credit Checks
What
is interest?
The Interest
Rate
The Headline Interest Rate
The APR
The
Base Rate
The
Consumer Credit Act
The Credit Agreement
What is a personal loan
A personal loan is money you borrow from a financial institution - for example a bank or a building society.
Return
to TopHow do they work?
You borrow an agreed sum of money for an agreed length of time (normally anything from 6 months to 10 years or more).
The lender makes money by charging interest on the loan.
The interest rate
can be either fixed or variable.
Loans are either secured personal loans or unsecured.
Types of Loan
Secured Personal
Loans
Unsecured Loans
Fixed
interest rate loans
Variable interest
rate loans
Secured Personal Loans
A type of loan where the money lent is secured against your possessions - typically your home. (That's why they're often also called Home Owner Loans).
If you default on the payments, the lender can claim whatever property you used to secure the loan.
They'll sell it to recoup their money.
Secured
personal loans cost less than the other major type of loan - unsecured
loans. They also tend to be easier to arrange.
It's very unlikely
you'll be "credit scored"
Unsecured Loans
A type of loan where you don't put anything up as collateral ie any property.
If you default on the loan your lender hasn't got anything to grab back from you to recoup their losses.
Unsecured Loans are riskier for the lender. This is why they're more expensive than secured personal loans / home owner loans.
They also usually take
longer to arrange.
You'll almost certainly be "credit
scored" if you apply for an unsecured loan.
There is an argument that there's no such thing as a truly unsecured loan in that if you default, what possessions you have could still be seized by the lender to repay what you owe.
However proper unsecured loans - where this can't happen - are available.
Just make sure that if you are paying higher interest rates, it's for a loan that really is an unsecured loan.
You will be able to tell this from the small print of the agreement you'd have to sign. Don't just go by the name alone.
Fixed interest rate loans
This is when the rate of interest you pay for the loan stays at a fixed rate throughout the term of the loan.
The fixed rate is agreed at the start of the loan
The advantage of a fixed rate is that you know what you'll be paying back each month.
But the disadvantage is that it'll be more expensive than a variable interest rate loan.
Variable interest rate loans
This is where the interest rate will change during the term of the loan. So the amount you have to repay will change from time to time.
The change will depend on the general state of the economy at the time and what level the Bank of England base rate happens to be.
How to get a loan
Before you make the leap, have a think. Do you really need the loan?
Loans are generally an expensive way to raise money. We suggest you consider some alternatives first.
However, if you have decided you want a loan:
Where
to go for a loan
What's the
process?
Credit Checks
Where to get loans
Loans are provided by financial bodies. Building societies and banks and are the obvious places to get them. However supermarkets are also getting in on the act.
You can visit these lenders in person or get on the phone to them.
Most have websites where you can apply online.
Loan brokers (aka Finance Brokers) advertise in the press and usually have websites.
They may be "principle lenders" themselves ie the people who are actually lending the money. However they are much more likely to be the middlemen.
The attraction of going through them is that they should be able to find you the best interest rate ie the cheapest loan.
The lower the interest rate the cheaper the loan. (At the end of the day you could be talking about a difference of thousands of pounds that you've had to repay).
However it's important that you shop around and don't just take their word for it.
That's what we emphasis ourselves. If you want to get a loan through us, we want you to test us against other quotes.
In any event be careful of who you deal with. There are plenty of "loansharks" waiting to gobble up the unsuspecting.
The worst type of lenders are those who knock on the doors of poorer housing estates showing people catalogues of consumer goods and offering to lend money so that they can buy them there and then.
The borrower may have to pay only a few pounds a week - which the "helpful" lender comes to collect. However the rates of interest involved are exorbitant and the cost of the goods is way over what they could have been bought for in the high street.
The antidote to this is the growth of the local credit unions.
Check if you've got one in your area and whether you're eligible for a loan from them.
What's the process?
To apply for any type of loan you'd have to give fairly extensive personal details ie full name, address, date of birth (though not usually your National Insurance number).
You'd probablly do this through an application form - which you'd post to the lender or - if it's online - send by pressing a "submit" button or whatever.
It's usually much quicker to get secured personal loans / home owner loans than unsecured loans.
If you'd applied for an unsecured loan you'd be "credit scored".
Credit Scoring
A detailed credit check is carried out on you when you apply for most financial products.
The lenders will use the records held on your credit history by one of the credit reference agencies, Experian or Equifax.
Your financial situation will be examined. For example your income and expenditure will be looked at. Are you relatively stable? Do you always overspend?
Basically the lenders want to know how trustworthy you are when it comes to money - particularly their money.
The reason you're applying for the loan will also be considered.
Despite being very thorough, the entire process should be fairly quick.
Many people don't like the idea of having a credit check carried out on them .
There is a possibility of applying for a loan which doesn't involve being credit scored. If you want to do this click here
About Interest
What is interest?
The Interest Rate
The
Headline Interest Rate
The APR
The Base Rate
What is interest?
When
they lend you money the lender makes a profit by charging interest.
The
interest rate is expressed as a percentage of the amount loaned.
For example, say you've borrowed £100 at an interest rate of 7% per annum.
That means you would be paying £7 in interest (ie 7% of £100) - so you'd have to pay a total of £107 back.
The Interest Rate
This is the amount of interest you're charged and will affect what you have to pay back.
For example, if you've borrowed £100 and the interest rate is 5% that means you would be paying £5 in interest - so you'd have to pay a total of £105 back.
The interest rate should always be referred to as an Annual Percentage Rate (the APR).
Lenders will often show the monthly interest rate. However, even if they do they always have to show the APR it reflects.
The APR will probably be shown in the small print of the advert so do have a look as it will save you a lot of time comparing different loans.
The Headline Interest Rate
This is the interest rate you'll see quoted in the adverts .
Basically you shouldn't take it too seriously. It's a means the lenders use to attract enquiries.
The interest rate they offer you may well be different because of your personal credit score.
These are usually expressed as a monthly interest rate. However you should always compare loans using the Annual Percentage Rate (the APR).
The APR
The APR (Annual Percentage Rate) is a method of providing a true comparison between different loans. It shows the true interest rate of the loan.
The lower the APR on a loan the better because it means you have less interest to repay - so the loan is cheaper.
The APR is worked out according to strict legal guidelines and takes all the costs of the loan into account.
Without this certain charges could be hidden: for example, while a headline interest rate in an advert may claim to be only 1% a month, the APR may be 15%. In other words the monthly interest rate quoted cannot be correct. (15% a year is more than 12 times the 1% monthly charge).
The lender has to include everything in the APR, whereas they can effectively lie about the monthly rate.
The APR is a legal requirement. Lenders have to make clear what the APR is on each of their loans.
Particularly if it's a bad deal, the APR will probably be shown in the small print of the advert. Check it as it will save you a lot of time - and money - in helping you to compare different loans.
The Base Rate
The Bank of England officially sets a "base lending rate" from time to time. This is commonly called the base rate.
This is treated as the standard interest rate reference point by all the financial institutions.
The lender's interest rate will be set at an agreed level higher than the base rate.
So if the base rate is 5% and you're paying 3% "above base" you'll be paying 8% interest.
If the Bank of England raise it by 1.5% overnight the base rate would now be 6.5%.
So your variable rate loan would now be 9.5% ie still 3% above the base rate.
Loans
and the Law
Consumer Credit Act
This is the law that governs loans of up to £25,000.
It governs the amount that can be lent, how the loans can be marketed, processed, collected and so on.
It applies to both secured personal loans / home owner loans and unsecured loan.
The Credit Agreement
This is the written agreement between you and the lender, which you'll have to sign before being given the loan.
It would apply to either secured personal loans / home owner loans and unsecured loans.
It's tempting not to bother but always read the small print carefully.
If there's something you don't understand ask as many "stupid questions" as you feel like. If you don't get a clear answer keep asking until you do.
Remember that whoever is giving you the loan is making good money from you. So if you get the attitude that if you keep asking for clarification this will jeapordise your chances of getting the loan, it's probably because they've got something to hide.
Don't be tempted to go for it anyway. You will be best off walking away.
