What is a Personal Loan?
A Personal Loan is a method of borrowing a lump sum of money from a Financial Services Provider, such as a bank or building society. They’re known as personal loans because the money is for personal use, such as buying a car or home improvements, rather than a business loan for setting up a company.
There are certain things you can’t get a Personal Loan for. For example sometimes you aren’t allowed to use the money to buy a timeshare property.
First you fill out an application form giving details about yourself and your past. Then the Lender makes some checks and decides whether or not it wants to lend to you. If they are happy to lend you the money they deposit in your account by giving you a personal cheque or making an electronic transfer.
The amount of money you can borrow varies, but it is usually between £500 and £25,000. The loan provider makes its money by charging you Interest. All of the Interest for the whole period of the loan is added to the amount you are borrowing. You then pay the money back by paying a fixed amount each month.
You decide how long you want to take to pay the money back then make a repayment each month. The longer the period of the loan, the lower the monthly payments will be. However, because you are borrowing the money for a longer time more Interest is charged. This means that although the monthly payments are small you will have to pay back more money in total.
In general the more you borrow the lower (and therefore better) the Interest Rate is, but rates vary a lot between Lenders so you need to shop around to get the best deal. Often there are also other charges for setting up the loan and for repaying it early.
What if I have loan problems now?
If you have money problems now you need to take action straight away. Don’t just hope that your problems will disappear on their own because they won’t and you’ll just end up in an even more difficult position.
Don’t panic though. You aren’t the first person to get into financial difficulties and you won’t be the last. There are organisations to give you advice and, believe it or not, if they are any good your Lender may be able to help.
They can come up with a new arrangement by reducing the amount you have to pay each month.
They want to get their money back and they would prefer to do so over a longer period of time than not at all.
However, you need to be realistic when you talk to them about what you can afford to pay. If they go to the trouble of restructuring your loan and you still find it hard to make the payments then they won’t be pleased and may lose sympathy with you.
Payment Protection Insurance?
When you are taking out a loan the Lender will often suggest that you take out insurance against not being able to keep up the payments. You don’t need this.
This can be called Payment Protection Insurance (PPI), Loan Protection Insurance, Credit Insurance, or simply Loan Insurance.
The idea is that it will pay your monthly repayments if you can’t because you have an accident, you’re sick or you become unemployed. For this reason it can also be referred to as ASU cover. The insurance payments are added to your monthly loan repayment each month and has been a nice way for banks to skim extra money out of unsuspecting members of the public.
When you are taking out a loan it is important to shop around so that you can be confident you are getting a good deal. Decide on the sort of Loan Terms you are looking for and get at least three quotes so that you can compare what is on offer.
It is also important to know who you are dealing with. The Director General of Fair Trading, the head of the independent consumer organisation the Office of Fair Trading, must license companies lending money to consumers. You can apply to them to find out if a particular business has a licence.
Office of Fair Trading,
Consumer Credit Licensing Bureau,
40 Uxbridge Road,
London W5 2BS
Tel: 0207 211 8608
Once you’ve taken out a loan you need to keep an eye on things to make sure that they are happening as you expected. Keep your Credit Agreement and any other documents you get together in a save place. If you feel things aren’t going as expected then contact your Lender straight away. If you feel that you want some legal advice then start by contacting your local Citizens Advice Bureau
Alternatives to loans
Do You Really Need the Money?
First of all, before you go any further, you need to take a step back and look at your situation. Do you really need to borrow money?
It’s easy to feel that buying a new car or going on holiday are essential but could you go without? Borrowing money is expensive and you will have to pay back much more than you get to spend, so think about it.
Is it really worth it? Many people who borrow money find that later on they wish they hadn’t. Also, the money you will spend paying back your loan could be working for you instead. You could invest it and let is earn more money for you in the future.
Could You Borrow Less?
For all the reasons that it is a good idea not to borrow money it is a good idea to borrow as little as possible. Each extra pound that you borrow will cost you much more than a pound to pay back so think carefully about how much you need.
Do You Have To Spend The Money Now?
If you can delay spending you could save yourself money. Even if you decide you need that new car or holiday, could you wait a few more months? If you can wait for a while and save up some money you won’t have to borrow as much.
Do You Already Have The Cash Saved Up?
It’s comforting to have money saved up in the bank, but are you putting it to best use? The Interest you earn on your savings isn’t as much as the Interest you pay when borrowing money so using savings is a much cheaper than borrowing. If you do decide to use some of your savings, leave tax protected savings, such as TESSAs and ISAs until last.
Could You Extend Your Mortgage?
Your mortgage will probably be at a lower rate of Interest than any available loans. This makes borrowing much cheaper so could you add your loan to your mortgage? However, although it’s cheaper, a mortgage is usually over a longer period of time than a lone and the longer you take to pay a loan back the more you pay in total.
Flexible mortgages have become popular in recent year. They area cheap way of borrowing and paying back money and will be useful if you need to do this a lot. However, your home will be at risk if you can’t make the repayments so plan carefully and be disciplined
Could You Borrow From Your Employer?
You may feel that it would be embarrassing to go to your employer for a loan but this could be one of your cheapest options for borrowing money. It could also be useful if you just need a small, short-term loan that you will pay back out of your next wages. They will probably charge you a much lower rate of Interest than the alternatives, and many big companies have policies for this already in place.
Swallow your pride and ask the personnel department or in a small company go straight to your boss.
The disadvantage of taking this route is that it may mean that you have to stay working for the company for longer. Or you will have to pay the money back when you leave by taking out a more expensive loan from somewhere else.
Can You Get a Graduate Loan?
If you have recently left higher education and just started your first job your bank may be able to offer you a graduate loan.
They are usually cheaper than other Personal Loans and are supposed to be used for the costs you will incur when you start a new job such as a new suit or a deposit on your first home. Decide if you like the bank you are with first because these loans may tie you to them for quite a while.
Flexible mortgages have become popular in recent years. They area cheap way of borrowing and paying back money and will be useful if you need to do this a lot. However, your home will be at risk if you can’t make the repayments so plan carefully and be disciplined
Where can I get a loan?
There are a lot more places offering loans than used to be the case.
The high street banks and building societies have always been around but some other Lenders, such as supermarkets, are new on the scene.
For most people these used to be the only place where you could legally get a Personal Loan. They could charge high Interest Rates and you had to make an effort to treat your bank manager in the right way or you had nowhere to turn to if you got into financial difficulties.
There’s more competition now and you can shop around so the banks have had to improve their rates. They may not be the cheapest but they’ve been around for a long time and are probably the most trustworthy – in theory anyway.
Credit Unions are financial organisations run by their members for their members. They are cooperatives that were set up to help people save and borrow money while avoiding the profit making commercial Lenders.
Members of a credit union must have a ‘common bond’. They could:
· Live in the same place
· Work in the same place
· Have the same occupation
· Be in the same trade union
· Be in the same church
Credit Unions can pay up to 8% in Interest on your savings. You still have to pay tax on this but it isn’t charged at source. You can borrow up to three times the amount you have saved and pay less than 1% per month in Interest.