What is a personal loan?
A loan is an agreement between you and a financial institution (usually a bank) whereby you will borrow money which you will repay back over a period of time. In return for you borrowing the money, the bank will usually charge you a set interest rate on the amount you borrow which is calculated up to the end of the term of the loan.
Most loan providers will set a minimum amount that you can borrow, e.g. £1,000.00 up to a maximum amount. The maximum amount you can normally borrow for an unsecured personal loan is £25,000.00.
If you wanted to borrow anything above £25,000.00, you would need to apply for a secured loan (sometimes referred to as homeowner loans). This is where the bank or loan provider will ask you to offer some form of security in return for the loan. You would normally offer the collateral or equity built up in your home as security against the loan. The idea is that if you default on your loan repayments, the bank can then recoup what it is owed by repossessing your home. Secured loans can often be easier to apply for than unsecured loans, the reason being that the bank has the added security of your home should anything untoward happen and you are unable to meet your repayments.
Why would I want a loan?
You may need a loan to consolidate any existing debts such as credit cards, store cards etc into one easier and more affordable monthly repayment. You may also need a loan for a new car or to finance a wedding or other special occasion. Sometimes in life, unexpected things can happen and you may need to take out a loan for maintenance around the home or general home improvements.
What interest rate will I get?
The interest rate, together with the loan amount that your bank will offer you will depend on your credit rating. You may already have debts outstanding on credit cards or store cards for example, or your income may not be sufficient to meet the loan repayments. All these factors will influence a bank’s decision on whether or not they will lend to you. If you have a history of poor credit or if you are just interested in what is recorded on your credit files, we would recommend that you obtain a copy of your credit report from the three main credit reference agencies:
- Experian
- Equifax
- Callcredit
What are buy now pay later loans?
Some loan providers will offer you what is known as buy now pay later loans. This is just a normal loan that allows you some additional flexibility at the start of the contract whereby you can defer your first repayment for up to two or three months before having to start making payments.
The advantage of these loans is that you will still get the money you need now, but you won’t have to start repaying for a couple of months. This may be of benefit to you particularly if you have had previous money worried and need to give yourself some room to breathe for a couple of months.
However, be careful with these offers. As tempting as they are, you may find that if you opt for a buy now pay later loan, the interest rate may be slightly higher than a normal loan where you start repayments straightaway. In the long run, you could end up repaying more interest.
Payment Protection Insurance (PPI)
Most banks and loan providers will offer you the option of protecting your loan by taking out additional loan protection insurance, often referred to as Payment Protection Insurance (PPI). The cost of the insurance is usually added to the loan and you will normally pay this with your monthly loan repayment.
PPI is designed to protect you against having a major accident, falling ill or losing your job whereby you will be unable to meet your loan repayments.
However, PPI has been highly criticised as in reality, this is usually not the case as most insurance contracts have so many hidden clauses written into them that it is sometimes impossible to get your bank to meet its obligations in repaying the loan. This is why, in the last couple of years, there has been a huge increase in the number of complaints to banks and the Financial Ombudsman Service (FOS) about the miss-selling of payment protection insurance. The FOS currently handles 500 complaints about PPI per week of which around half of these are upheld.
The important thing to remember with payment protection insurance is that this is entirely optional and that you do not need to take this up when applying for a loan. You should also not feel bullied into purchasing this by your bank if you do not feel that the insurance is adequate for your needs. Remember, banks make millions of pounds in profit from PPI. Do not pay them more money for something that provides inadequate cover and that you do not really need.
This is not to say that the general idea of payment protection insurance is not important. It is important that should you fall ill or lose your job that you are able to maintain your monthly loan repayments. However, there may be better alternatives that you should consider such as Income Protection Insurance or Permanent Health Insurance.
