The world of financial jargon can overwhelm the best of us, especially those of us who are looking to take out a loan of any other type of financial product. But it doesn’t matter whether you have previously borrowed money or if you are about to start your first application as this article will give you a better understanding of financial jargon so you can make informed decisions regarding your finances.
Early repayment penalty
While early repayment penalties are less common today than they used to be, just a few years ago most loan companies actually fined people who repaid their loans earlier than expected. Today though, most unsecured loan companies allow you to repay the remainder of what you’ve borrowedin advance of the date you both agreed on which a loan would be fully paid off.
If you take out a loan with a company which doesn’t issue early repayment penalties, you have more leeway to control your finances and debt. For example, if you took out a loan to cover household bills but have since experienced a change in your financial situation and no longer need to borrow money, you can repay your debt quicker without paying an unnecessary fee.
If you directly approached and then borrowed money from a loan company, then they are your direct lender. There are two different types of direct lenders:
- One which solely deals with applicants that approach them directly (for example, via their website)
- One that deals with direct applicants and customers that had been introduced by a broker (read on to find out what this means).
Have you ever used a company that connected you with your ideal lender? If you answered yes, then you have used a loan broker. A loan broker works as a third-party business which finds and connects the right lender and borrower to one another.
How do they do this? Each loan broker will look at your personal circumstances, such as the amount of money that you want to borrow and then finds a lender that would agree to work with you.
Most loan brokers earn money by charging the borrower a fee for using their service or by receiving money from their loan panel each time that a customer introduced by them takes out a loan.
You should note that every official loan broker must be registered with the Financial Conduct Authority (FCA) and that all the companies on their loan panel (meaning that the lender and broker have a good relationship) must also be licensed with the FCA.
If you know of a loan broker that isn’t registered with the FCA, we strongly advice that you don’t take out a loan through them because it’s illegal to lend someone money without this important licence and because you, as a borrower, don’t get the enhanced protections on offer.
Every loan company has a set of criteria which outlines who can borrow money from them. This is called a borrower profile and it’s one of the features that potential borrowers worry about the most.
Even if you have a good credit score, you could still not be approved for a loan if you don’t match the lender’s borrower profile. But what’s usually included in one of these profiles?
- How much you earn monthly or annually
- Your level of monthly outgoings
- The number of payments you have missed
- How many recent applications for credit you have made
- The terms of your employment (whether you are a full time or part time employee etc.)
- Your recent address history
- How many County Court Judgements you are involved in
- The percentage of your income that comes from benefits of tax credits
If the way you answer those questions is close to the answers they want to hear, then you are in with a good chance of getting a loan. The issue for every potential borrower is that they must take the time out of their day to complete a loan application with a lender without knowing if they will get a “yes” or a “no” to their request.
This is because loan companies don’t tend to publish their borrower profiles anywhere and that means that potential customers often and through no fault of their own end up wasting time applying for loans they won’t even be considered for. Because of this inconvenience, some people prefer to go through loan brokers to reduce their chances of getting a “no” to their application.
Many borrowers don’t fully understand what an interest rate is or how it affects their loan. That’s because, to be honest, the whole subject is both quite complicated and very mathematical.
The rate of APR attached to your loan represents how much interest you must pay over the course of a year. Before you agree to take out a loan, you should carefully consider the amount of APR attached to it.
However, while the APR accurately describe how much interest you will be charged if you took out the money for a year, it’s confusing when you’re taking out a payday loan or a short-term loan.
Many borrowers find “daily interest” more understandable especially with payday loans or short-term loans.
A daily interest of 0.2% would mean that, for every £100 you took out, you’d pay 20p interest each day. If the daily interest rate was 2%, then you’d pay £2.00 each.
The law dictates that every loan company should display their “representative APR” on their website and on their advertising. The representative APR is the rate than at least 51 out of 100 customers pay on their loans. Of course, this does mean that the remaining 49 out of 100 borrowers will pay a different interest rate – sometimes more, sometimes less.
Each time that you take out a loan, you agree on a fixed schedule to repay the money you’ve borrowed.
Let’s guide you through two examples of how two different loan repayments work. Let’s say that you took out a payday loan for £100.You would then need to repay the full amount within 30 days plus the amount of interest charged by your lender.
On the other hand, let’s say that, instead, you took out a short-term loan for £100 and you have the choice of repaying it anywhere between 2 to 12 months. If you chose to repay the money within 6 months for example, you will be given a repayment schedule for that period. Your 6-month schedule will dictate how much you should pay and on which days.
Every repayment you make is collected by a Continuous Payment Authority (CPA) which gives your lender the authority to remove funds from your bank account using a debit card. Your lender is restricted to only two attempts to collect a payment with CPA. If they have failed twice to take your repayment, you must then give them permission to try again.
While you hold the legal right to cancel your CPA at any time, we strongly advise that you notify your lender before doing so. Many borrowers have cancelled their CPA when they worry that they’re not going to make a repayment on time. If this is you, please contact your lender to let them know that you’re having financial difficulties and let them have a chance of helping you out.
What is a credit score and what does it mean? Your credit score is simply a number that indicates how well you have repaid your loans, credit cards and household bills. Credit reference agencies are responsible for creating your credit score, three of which operate in the UK. They are:
Companies which you have taken out finance with and businesses that provide something for your home, such as broadband providers, work with credit reference agencies by sending them the information they need to keep your credit report up to date..
Everything is recorded on your credit report – whether it’s good or bad. For example, if you make a payment on the right date for the full amount it will be recorded, as will any times that you have missed a payment.
Your individual credit score details whether you’re currently in debt and the amount of money that you owe. Your credit score also shows how close you are to reaching your credit card limit, any County Court Judgement, whether you’re in an Individual Voluntary Arrangement or not, and more.
Your lender will look at your credit score and credit report when deciding whether to lend you money. In summary, if you have a history of taking out loans that you don’t repay in time or if you fail to stay up to date when paying household bills, you will have a less than perfect credit score and a high-street lender is likely to reject your loan application.
However, payday loan and short-term loan companies think differently. They’re more concerned about who you are today than who you were a few years ago. While they do take your credit score into account, it’s generally much less important to them than it is to a High Street bank.
Before a lender agrees to let you borrow money, they may ask you to put down “security”. Security to them is their safety net if you can’t repay your loan in full. While your mortgage uses your home as security, other types of security used by loan companies could be expensive household items (like at a pawnbroker) or even your car (like a logbook loan company) depending on how much money you have borrowed.
If a lender does ask for security and you fail to repay the money you’ve borrowed, the security you gave your lender will be sold so that your finance provider can use the proceeds of that sale to pay off the part of the loan you couldn’t settle.
If possible, always take out an unsecured loan.
Get the cheapest short-term loans from licensed lenders with LoanBroker
At LoanTube we area team of highly experienced credit brokers, not lenders. So, what does this mean for you? We know our lenders really well so, when you submit your details to us on your application, we use that knowledge to introduce you to your ideal finance company.
Because of the good relationship we enjoy with the companies on our lending panel, we know exactly which ones will be the happiest to let you borrow a short-term loan. With us, you can avoid wasting your time by filling out multiple loan applications and greatly reduce the risk of getting a “no” to your application.
Our advanced computer system uses state-of-the-art technology to match you with the loan companies which are most likely to say “yes” to you.
Start the process with LoanBroker today.