Personal Loans
Types of Personal Loans
Personal loans are available in a wide variety of different forms, and with many different characteristics, such as:
- Secured or unsecured
- Fixed or variable interest rates
- Short term or long term
Companies also offer specialised personal loans for certain groups of people, for example:
- Students
- People with poor credit ratings
Secured V Unsecured Personal Loans
Unsecured personal loans allow you to raise between £1,000 and £25,000, to be repaid over a period of one to seven years.
The main advantage of unsecured personal loans over secured personal loans is that your home and assets are not at risk if you do not keep up with the repayments.
The main disadvantage of unsecured personal loans is that the interest rate you pay is typically higher because the risk to the bank is higher.
What is APR?
APR means Annual Percentage Rate.
This is the rate of interest that will be applied to your loan. It represents that amount of interest that would be charged over the length of a year. This makes interest rates more comparable across personal loans with different repayment terms/periods. Note that the actual interest charged on your loan will typically be calculated on a daily basis.
Typical APR means that the actual APR will depend on your credit rating, and will therefore not necessarily be the same rate as the interest rate advertised.
What is PPI?
PPI means Payment Protection Insurance.
PPI is intended to cover your monthly repayments if you are unable to work due to sickness, accident or unemployment, and hence cannot make your repayments. PPI also covers you in the event of your death, by repaying the outstanding loan amount.
Should I take out PPI?
Loan providers are often keen for you to take out PPI, since it reduces the risk of you defaulting on your loan repayments, and also they may receive a commission on the sale.
You should consider whether this type of insurance cover is suitable for your needs, since you are often eligible to receive long term sick pay from your employer in the event of serious illness, and you may already have sufficient life insurance.
Deferment Periods and Repayment Holidays
A deferment period is where the lender allows a period of time to pass between the drawing of the loan and the first repayment. Typically the first repayment is made one month after the drawing of the loan, but deferment periods can be up to 6 months.
Repayment holidays are periods during the course of the loan where no repayments are made. For example, some lenders may not require any repayments to be made in January, since this is often a difficult time for borrowers after the Christmas period. You may sometimes be able to arrange a repayment holiday with your lender during a period of financial difficulty, to ease your cash flow.
The downside of both these features is that interest continues to accumulate during the deferment period or repayment holiday, which ultimately results in you paying more in interest charges.
Early Repayment
Repaying a personal loan early can save your hundreds or even thousands of pounds in interest charges.
Under the terms of the Consumer Credit Act an early repayment penalty of one month’s interest is payable. This applies when the original term of the loan is more than one year and the advance is £25,000 or less. For terms of one year or less, no redemption penalty is payable.
Where you are refinancing, you should take this penalty into consideration in your calculations, since you may find it more worthwhile to remain with your current financing situation.
What if I cannot make the Repayments?
Where your personal financial circumstances change, and you find yourself struggling to make repayments, you should speak to your loan provider. It is in the lenders interest to reach a compromise which suits your changed personal circumstances, and therefore speaking to your lender is often the best course of action.
Note there are several organisations available to help by offering free independent advice. These include:
- Citizens Advice Bureau
- Consumer Credit Counselling Service
- National Debtline
The worst course of action is to ignore the situation, in the hope that the problem will resolve itself. Missing repayments is likely to result in excessive charges being imposed by your bank and loan provider.
Personal Loans V Overdrafts and Credit Cards
If you are looking for a short terms source of finance, then you may find it more flexible to use an overdraft or credit card, since these can be repaid over a period to suit you. Note however that these sources of finance often involve higher APRs, and the outstanding balance may be repayable on demand.
Other Sources of Finance
If you are looking to take out a personal loan to purchase something, you may find that some retailers offer the product on interest free credit terms. You will find this is a cheaper source of finance, provided you repay the loan amount within the agreed term.
