A Brief Guide To Loans

December 12th, 2019
A

Overview

  • There are three main categories of loan: personal, secured and debt consolidation
  • These can be sourced from banks and online lenders
  • The single most important consideration when taking a loan is whether you will be able to afford repayments
  • Also be aware that taking out a loan can affect your credit score
  • By law (The Consumer Credit Act) you must be made fully aware by the lender of the total cost of repaying the loan before you enter upon an agreement
  • The term ‘typical APR’ refers to the generic interest rate for a loan that most customers will receive, though lenders are not compelled to lend at this rate
  • To secure a loan you will need to divulge some personal details and agree to a credit score check.

Types of loans: clarifying the definitions

Personal loans

Also referred to as unsecured loans, these are issued by lenders based upon your personal credit rating. Duration of repayment is a maximum of ten years and maximum sum borrowable is £25,000.

Secured loans

With secured loans you offer assets (house, car) as security against any potential repayment default. To be clear, this means that if you fail to meet your repayments, these assets could to be seized. Duration of repayment is a maximum of 25 years and maximum sum borrowable is £100,000.

Debt Consolidation loans

This type of loan allows you to consolidate all existing debts in one new loan with a single interest rate and has the advantage of simplifying your credit strands and generally lowering interest payments.

Sourcing loans

In the UK loans are available from many different sources: banks and building societies, internet lenders, the major supermarkets and high street retailers, and providers of secured loans. The range of loan-providers has increased significantly over recent years and it is more important than ever to be fully informed of your options if you are going to find the loan that works best for you.

Important considerations when looking for a loan

  • Most importantly, is the repayment schedule for your loan realistic? Will you be able to afford the monthly payments?
  • How does the APR (Annual Percentage Rate) compare to rival loans?
  • Will charges be added either for brokering the loan (arrangement fee) or for early termination of the loan (redemption fee/penalty)
  • Does your loan agreement include a clause which allows for you to defer payments/take a payment break should you be experiencing financial difficulty?

Representative APR (Annual Percentage Rates) explained

Not as straightforward as it sounds, the APR is the figure quoted by lenders when advertising a specific loan.

However, any lender is only legally obliged to offer this loan rate to half of the applicants who are accepted onto the loan. The remaining fifty percent may find that they are paying higher or lower rates, depending on their credit history. This is known as risk-based pricing.

The credit-check processTop of Form

Bottom of Form

To assess your ability to repay a loan, lenders will ask for proofs of identity, address and bank details and will also generally check your credit history.

Credit checks are performed by credit reference agencies and reveal any issues you may have had managing debt in the past, such as missed credit card payments or County Court Judgements.

It is a simple process to check your own credit rating and can be done online through Experian

Early repayment penalties explained

These are charges applied for early termination, or in other words when you repay the full amount early. Generally, these tend to be the equivalent of one or two monthly repayments but not all lenders charge these penalties.

If you feel you may want to repay early, you should search for a loan which does not involve early repayment penalties.

Legal protection: the Consumer Credit Act

The Consumer Credit Act enforces certain conditions on UK lenders, who have to be licensed by the Office of Fair Trading.

These include the need to inform potential clients of the true interest rate they will be charged if they take out a loan and, in many circumstances, to offer a cooling-off period which allows the client to cancel the loan agreement if you have reconsidered.

Some terms explained

  • Adverse credit rating: a poor credit history. Your credit rating can be adversely affected by any form of debt mismanagement, such as mortgage arrears or County Court Judgements
  • APR (Annual Percentage Rate): is the interest rate applied to the loan annually.
  • Credit reference agency: companies with access to the details of your credit history, which is used in turn by lenders when they assess your loan application.
  • Debt consolidation loan: one loan which replaces all of your outstanding debts (credit cards, overdrafts) and in the process generally reduces interest payments.
  • Early repayment penalty: a penalty charge applied to your loan if you choose to repay the full amount early. Not all loans include these charges and it is important to read the small print of any loan contract before signing.
  • Loan payment deferment: the contractually-agreed right to take a short break from loan repayments, also referred to as a payment holiday. Again, read the small print to see whether this option is included in your loan terms and conditions.
  • Payment protection insurance: if taken out, this ensures that, for a fixed period, your loan repayments will be covered if you are unable to afford them because of illness, injury or redundancy.
  • Personal loan: also referred to as an unsecured loan as it is not contingent upon you offering security, in the form of property, against the value of the loan.
  • Secured loan: a loan which is secured against your personal or business assets (house, car). With this type of loan, failing to meet loan repayments can result in the loss of these assets.

Representative APR: this is the loan rate that a lender is legally obliged to offer to at least 50% of successful applicants. The actual rate the remainder are charged could be slightly higher or lower depending upon their credit history.

4000+ reviews