Simple guide to personal loans

November 8th, 2013

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On occasions our wages and savings are simply not enough to pay for the expensive items that we need and so we rely on credit from a regulated financial institution like a bank.

There are several ways of gaining credit/money but the most common form of credit along with credit cards is a personal loan, also known as an unsecured loan. Personal loans are simplistic in their structure; in such, that you and the financial institution agree a set amount that would be borrowed and paid off by regular monthly instalments over a set period of time.

Payments made simple and easy.

With personal loans, you know exactly what you owe, how much to pay and when the loan will be consolidated, making budgeting a simpler task. Financial institutions may be willing to lend up to £25,000 over a term of between 1 – 10 years but personal loans are only suitable for consumers that require several thousands of pounds as the best rates are offered on borrowing amounts of between £7500- £15000.

The calculator will show you the best deal for your circumstance.

Please note, lenders label loans under various categories and at the point of application you will always be asked to specify the purpose of the loan. There are always certain categories which lenders will deem inappropriate and hence refuse the loan on that basis.

What does unsecured mean?

Unsecured literally means that the loan is lent unsecured against any asset unlike a secured loan where it is usually secured against your home. So if you do not pay, your home is not at risk unlike a secured loan. However, non-payment will result in a debt agency call or even court action.

What interest rate would I pay and how much would I pay?

The rate at which you pay the borrowed money will vary depending on the amount, term of loan, credit score, and finally the institution that you borrow from;

Credit Score

People with poor credit scores may be denied a loan or charged a much higher rate of interest to compensate the lender for taking on the higher risk of default.

The amount of the loan

Generally lenders charge a lower rate of interest for larger amounts then smaller amounts. Even though, discipline is still required and so, you should not borrow more than you need or could afford to pay back.

Term of a loan

Lenders may have loan products at various rates of interest depending on the term; for example, Sainsburys Bank with a lending term of 1-3 years will charge annual interest rate of 4.9% for amounts between £7,500- £15,000 but if you wanted a loan for 4 or 5 years the rate goes up to 5.1%, in which case, the Derbyshire Building Society offer a better deal at 5% for loan terms of between 1-5 years.

For borrowing periods of more than 5 years, the number of lenders reduces, with Sainsburys Bank charging 7.1% for loans between 1-7 years. Comparatively, If you are looking for a loan of more than 5 years, then Tesco Bank is offering a deal of 5.1% for up to 10 years. However, extending a loan period means you are paying more in total over the term of the loan.

For example if you take Tesco’s loan product of 1- 10 years and say you borrow £10,000 at 5.1% on a 3 year payment term. Then you would pay a monthly amount of £300.16p with total repayment including interest (at maturity of loan) of £10805.69.

If you extend that loan to 5 years, monthly payment goes down to £189.17 but the pay back amount to the lender increases to £11,350.25. Suppose you really wanted to take your time paying the loan off and took the full 10 years, then your monthly payment drops to £106.55 but the amount you’d pay back goes up to £12786.6

The question is, “do you really want to be paying more than you have to?”

Change in rates from one day to the next

You may find yourself in a situation where by the quote you received initially has changed by the time you decided to take the deal. This is due to the fact that money is bought and sold on the Money Markets with rates varying every minute, and your loan is subject to market variations until it has been booked.

Rates to grab your attention

Lenders will always advertise their best rates as a mean to draw your attention. However, the advertised attention grabbing rate need only apply to 51% of successful applicants and consequently you may fall outside the brief, meaning you will be offered a higher rate. So, be aware of the whole market before making a final decision.

To get the best deal -search the market. compares 100s of loan deals to get you the best rates without you having to spend hours going from one high street bank to the next or making phone call after phone call.

As always, our service is free, independent and impartial so you can be rest assured that our service is line with your best interests.

*Rates and figures are subject to change and were correct at time of publication


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