A guide to unsecured personal loans
A Guide to Unsecured Personal Loans
Unsecured personal loans are offered by lending institutions such as banks and
building societies and are so called because the lender requires no security for
the debt. They are not available for speculative purposes or business purposes.
Depending on the individual lender some other purposes may also be excluded, for
example the purchase of timeshare property. Below is a quick and easy guide to
UK personal loans.
Choosing the right loan
Personal loans are available for a range of different amounts and repayment
terms. Depending on the amount and purpose of the loan, you will be able to
choose from a range of repayment periods. Larger loans such as those over
£10,000 can usually be taken over longer terms i.e. 7 to 10 years. The minimum
loan amount is typically £1,000 although some lenders do offer £500 and upwards.
The maximum amount you can borrow is £25,000, although this will vary between
lenders and products.
If you’re a homeowner you can consider a secured loan.
The amount borrowed is subject to an interest charge, and the interest rate
applied is known as the Annual Percentage Rate (APR). Generally, it is advisable
to compare the APRs of different products as a means of determining how
competitive they really are. 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 a good place to
start. Lenders do quote interest rates in different ways, and it's worth
familiarising yourself with these before you start:
A fixed interest rate will stay the same throughout the term of the
loan,
regardless of any changes in the bank base rate. This means your monthly
repayments should always stay the same, allowing you to budget accurately.
A variable interest rate may rise and fall in line with any changes to the bank
base rate. This could result in your monthly repayments changing during the
term.
In addition:
A typical interest rate is an indication of the rate you will be offered as it
is the rate that over 66% of successful applicants receive. The exact rate
offered to you will be dependent on the loan amount and term and on an
assessment of your personal circumstances.
A set interest rate is offered to all successful applicants, regardless of the
risk they present and the loan amount and term.
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. 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.
Personal loans are repayable on a monthly basis. If there is a degree of
flexibility then the lender may permit over-payments and lump-sum payments, both
of which allow you to clear the debt over a shorter time period than first
agreed. 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.
Getting accepted for a personal loan can sometimes prove difficult if you’ve got
bad credit, have changed addresses frequently, have no previous credit history
or are self-employed. There are lenders who can help those who need 'bad credit'
loans and those who have difficult personal circumstances. The APR is likely to
be higher than that offered by a standard personal loan provider, but the
chances of getting accepted are far greater.
If you’re a homeowner with ‘bad credit’ or difficult personal circumstances it
may be worth considering a secured loan. These are also called secured personal
loans or second charge loans.
Personal loans 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 it's terms.
As extra protection for both yourself and the lender, insurance policies (known
as payment protection insurance) are available and these will cover your
repayments in the event of sickness, accident or unemployment. In the event of
your death your debt could even be repaid in full. Although beneficial, these
policies can be costly with both the cover and cost varying between lenders. You
should always check what a policy includes and excludes, as this may affect your
decision to take it out. Stand-alone policies are available and these may prove
better value than the policy offered by your personal loan company.
How do I apply?
You can apply online for your secured personal loan. This will ultimately save
you time as it means you won't need to contact the personal loan companies
direct.
Important. Second charge mortgages and secured personal loans are not regulated
by the Financial Services Authority (FSA).
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