Ashleigh Money Saver – On Personal Loans
(If you already know which loan is right for you, then you can compare the best rates with my Cheap Personal Loan Comparison here – Compare Best Buy Loan Rates)
What is a Loan?
When an entity such as an organisation or an individual provides an amount of money, credit or an asset to another organisation or individual, the entity is making a ‘loan’.
Most commercial loans are made on the basis of very specific set of conditions, which will specify (at the very least) the rate of interest charged, the amount of each repayment and the frequency of payment. Some loan contracts also stipulate the date when the loan must be repaid in full. Although most loans are monetary loans, any material object can be loaned by one party to another.
A loan can be secure or unsecured. In a secured loan arrangement, the lender will only make the advance if the borrower owns and/or pledges an asset or assets as collateral. One of the most common forms of secured loan is a mortgage where the financial institution, has a lien on the title to the property until the mortgage is paid off in full. If the borrower defaults on the loan, the bank or building society would have the legal right to repossess and sell the property, to recover the amount of money that is owed.
Unsecured loans do not require the borrower to pledge assets. The most common forms of unsecured loans include credit cards and some types of personal loans and bank overdrafts. Unsecured loans almost always cost the borrower more (in terms of Interest) than a secured loan would. The reason being, that if a unsecured borrower fails to repay what they owe, the lender’s options for recovering what they are owed are limited.
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More Info on — Personal Loans
A personal loan is a financial contract between two parties — a lender and a borrower. The lender, which is usually a bank, advances an agreed sum of money to the borrower, which he or she must be pay back — with interest — over a pre-agreed period of time. Although payments are usually made monthly, some personal loans are repaid on a quarterly basis.
Terms and conditions
Different lenders apply different terms and conditions: the precise terms and conditions will be laid out in the contract. One condition that applies to most personal loans is that the borrower must pay — without fail — the agreed amount on the specified repayment dates for the term of the loan.
Secured or unsecured?
Generally speaking, there are two types of personal loan: secured and unsecured. If the loan is secured, it is secured against one of the borrower’s assets — such as their home for example. Whereas an unsecured loan requires no form security, providing the borrower has an acceptable credit rating and can afford to make the repayments. Secured loans sometimes apply a lower rate of interest, than is charged on unsecured loans.
Most lenders limit the amount they’re willing to advance on an unsecured basis to £25,000; it is possible to borrow more then £25,000 using a secured loan.
Reasons for taking out a loan
Borrowers take out a personal loan for all kinds of reasons. To help pay for a special occasion such as a wedding, to purchase an expensive item such as car, to pay for a holiday, or to pay off some other loans. Depending on the borrower’s circumstances, needs and income, some personal loans may be more suitable than others.
Both the interest rate and the monthly repayment may fluctuate, or they may be fixed for part or all of the term of the loan. The interest rate, which is known as the representative APR (Annual Percentage Rate) is the advertised or ‘headline’ rate of interest — the lower the APR, the better.
If a borrower’s credit rating is less than perfect, he or she may still qualify for a loan but the interest charged will be higher than the representative APR. The longer the borrower takes to repay the loan, the more interest he or she will pay, although some lenders will allow over-payments, or early repayment in full, before the end of the agreement without penalty.
As well as paying interest, the borrower may also have be charged arrangement or administration fees.
The right to cancel
Once the loan agreement is signed, or when the borrower receives their copy of the agreement, the borrower has a 14-day ‘cooling-off’ period. During that time, he or she has the legal right to change their mind and not proceed with the loan.
Secured Personal Loans
A secured loan is a loan that is secured against the value of the borrowers’ home. For that reason, secured loans are normally available only to homeowners, although some lenders will consider providing secured loans against other assets.
Most secured loans are taken out to help pay for large sums of capital expenditure such as substantial home improvements, buying a new car or consolidating other loans into one loan and one monthly repayment. In common with a secured loan, the borrower will need to prove to the lender that he or she can afford to make the monthly repayments.
Secured loans provide lenders (which are usually banks) with a financial ‘safety net’ should the borrower subsequently fail to repay the loan. If the borrower defaults, the lender may seek to take possession of the borrower’s property and sell it in order to recoup the outstanding amount of the loan and the lender’s charges.
However, if a borrower is willing to pledge an asset to a lender, he or she may be considered to pose less of a risk for the lender. In return, the lender may apply a lower rate of interest and/or allow the borrower to take out a larger loan. (Being willing to secure a loan with a substantial asset can help someone with a less than perfect credit history, to obtain the advance.)
Unlike most unsecured loans, a secured loan can usually be repaid over a longer period of time and if the monthly payments are fixed (sometimes they are not) for the term of the loan, borrowers may be able to manage their finances with more certainty.
Borrowing for Car Finance
Buying a car using a personal loan from a bank or building society, enables the buyer to spread the loan repayments over a period of one to three years. Although a personal loan can be one of the cheapest way to borrow money over the long term, it can be difficult to get a loan if the lender considers the potential borrower’s credit rating to be not as good as it should be. Usually, the borrower owns the car while paying off the loan.
The buyer pays a deposit (normally about 10%) and then pays a fixed amount each month over an agreed period of time, which is usually between one and five years. A finance company buys (and owns) the car, which it then hires to the borrower who assumes responsibility for maintaining the vehicle. If the hirer fails to keep up their payments — and he or she has paid less than a third of the total amount payable — the lender can repossess the car without going to court. Only once the final payment has been made, does the car become the property of the user.
The two main types of car leasing arrangements are personal contract hire (PCH) and personal contract purchase (PCP). In both arrangements the lessee (the user of the car) makes fixed, monthly payments until the contract expires and is responsible for maintaining the car. Although the monthly payments may be lower than other types of finance, there may be restrictions on the annual mileage and other conditions. Under a PCH agreement, the lessee never gets the option to own the car, whereas with PCP the lessee can buy the car at the end of the contract by making a final, once-and-for-all payment.
Individuals who wish to bypass traditional sources of finance can borrow from peer-to-peer lending websites, although borrowers with the best credit scores usually pay the lowest rates of interest.
What are Guarantor Loans?
A guarantor loan is a type of personal loan where someone else (the ‘guarantor’) becomes responsible for paying off the debt, if the person who took out the loan originally fails to make the repayments.
If that happens, the guarantor’s property and other assets may be repossessed and/or the lender can legally take the borrower and the guarantor to court. Guarantors can be a family member or a friend, but not someone who is financially linked to the person who is taking out the loan, such as a spouse or a person with whom the borrower may already share financial products.
Who are they for?
Guarantor loans, which are repaid over a period of between one and five years, are designed specifically for individuals who have a poor, or non-existent, credit history. Not every loan provider offers Guarantor loans and those that do, are likely to charge a higher interest rate than they would for a ‘standard’, unsecured personal loan.
To apply for a guarantor loan, the potential borrower must be at least 18 years of age and have a UK bank account out of which the loan repayments will be made. The potential borrower must be able to prove to the lender that he or she can afford to make the monthly repayments.
The guarantor must be over 21 years of age, have an acceptable credit history and hold a UK bank account. Guarantors usually — but not always — own a home in the UK.
Rate of interest
The annual percentage rate (APR) of interest depends on: 1. the lender 2. the size of the advance and 3. the term of the loan. Because lenders are not required to cap the amount of interest they charge, the borrower may ultimately pay back more than the amount he or she originally borrowed.
Overpayments and early repayment
In common with other types of loans, borrowers may be charged an early repayment fee if they pay off the balance early, or incur a charge if they make overpayments.
Home Improvement Loans
As the name suggests, home improvement loans are used to help pay for a new kitchen, bathroom or an extra room. In common with other types of personal loans, there are two types of home improvement loans: secured and unsecured.
Secured or unsecured?
In a secured arrangement, the loan is secured against one or more of the borrower’s assets — such as his or her home for example. For that reason, borrowing on a secured basis can cost in terms of interest, than borrowing on an unsecured basis might cost. Furthermore, by providing security, the borrower may be able to negotiate a larger advance. But if the borrower fails to make the repayments, their collateral — i.e., their home would be at risk.
An unsecured loan requires no form security, providing the borrower has an acceptable credit rating and can afford to make the repayments. However, the interest rate is likely to be higher than it would be for a secured loan and it may not be possible to borrow as much as it would on a secured basis.
Rate of interest
Irrespective of whether the loan is secured or not, the annual percentage rate (APR) of interest will depend on: 1. the lender 2. the size of the advance and 3. the term of the loan.
Short Term Loans
As the name implies, and when compared to other types of loans, short-term loans are repaid over a relatively brief period of time. A car purchase loan, or a business loan might be repaid over five years or more: the repayment term for a mortgage can be decades.
Exactly what constitutes a short term loan varies from lender to lender: a typical ‘payday’ loan might need to be repaid in one week. Whereas repayments for an instalment loan might stretch over three months, or more.
How short-term loans work
Because the amounts involved can be quite small, £100 – £1000 for example, the application and approval process for a short-term loan can be quicker and easier than it would be for a long-term — and arguably more risky — loan. Conversely, with such small amounts of money involved, the lender has no security to fall back on. Although different lenders have different policies regarding non-payment, should the borrower fail to repay on time, he or she may be charged ‘late’ fees and risk damaging their credit rating.
Interest rates and fees
Short term loans cost more in the way of interest than conventional loans. Some lenders’ interest rates are fixed, some aren’t. The rates of interest for a short term loan are usually higher than they are for conventional loan — APRs of !000% or more, are not uncommon. In addition, lenders may charge fees upfront and apply further charges if a payment is made after the date it was due.
Some lenders will allow borrowers to reduce the interest by accepting overpayments.
Loans and grants to students (to pay tuition fees and living costs) studying in the UK are provided primarily by the Student Loans Company (SLC) — a non-departmental public body. Providing the individual is a UK resident, most undergraduate university students are eligible for a loan. As a loan can take up to six weeks to process, the loan application should be submitted as early as possible, although an application can be amended or cancelled if plans change.
Tuition fees are the amount publicly funded universities and colleges charge students each year to attend their courses; Tuition Fee Loans are designed to cover the cost of the tuition fees. Depending on the academic year the student started, the maximum loan is £9,000. Loans are paid directly to the university or college involved in three instalments spread across the academic year. If the student
chooses to study at a private university or college, the maximum Tuition Fee Loan is £6,000.
Repaying the loan
Loans must be repaid when the student finishes or leaves their course, but only if their income is £21,000 a year or more. When the student starts work, the SLC will tell HM Revenue & Customs (HMRC) to notify his or her employer and loan payments will be deducted automatically from the employee’s taxable earnings. Once the loan has been paid off, HMRC will notify the employer and the loan repayments finish.