According to the Guardian newspaper, at least one in ten Brits have a personal loan account live at any time. If you’re thinking about taking out a loan, what are the things that we at Loan Broker think that you need to know?
How do personal loans work?
With a personal loan, you borrow a fixed sum of money from a lender and agree to pay the loan back plus interest in monthly instalments over the term of the loan. The term can be anywhere between 2 months and 7 years, in general.
When you have made your final payment, your loan account is considered “settled” and then it is closed. During the term of the loan, your finance company will update your credit report on a monthly basis and record on your report whether you made your monthly repayments on time and in full or not.
If you have bad credit, there are lenders who want to help
When deciding whether to accept your loan application, a lender will look at two things:
- your current financial details, including income, outgoings, name of employer, address history, and more
- your credit report – this is a file which records your last 6 years’ payment history with lenders and some non-financial companies among other information
Some lenders will not work with people with less than perfect credit ratings. Many others will. A broker will be better able to point you in the direction of the lenders most likely to work with you saving you time and money.
What types of personal loan are there?
There are secured personal loans and unsecured personal loans.
Secured loans require you to allow a lender to put a “charge” on your property. That means that, if you can’t keep up repayments and fall into default, you are at risk of losing your home. Secured loans are often for between £10,000 and £100,000. The amount you can borrow depends on the “equity” in your home and your current financial circumstances. Tenants cannot take out secured loans.
Unsecured loans do not require you to put your home or other type of security up. They have higher interest rates than secured loans and you can only borrow normally between £1,000 and £25,000.
Your APR may be different from the one you see advertised
All lenders, by law, must advertise their APR – that’s the cost of a loan offered to at least 51% of their clients.
If you have a good credit record and your current finances are sound, you may be offered a lower interest rate. If your credit rating is not so good, you may be offered a loan but at a higher interest rate.
There may be other fees you have to consider
There are other charges you may have to pay to take out a loan. The four main types of charge are:
- brokers’ fees – if you use a broker, some of them charge you to use their service. Please note that Loan Broker does not charge brokers’ fees to our clients.
- origination fees – that’s the cost for taking a loan out. They are sometimes called “arrangement fees” and they are quite common on mortgages and secured loans.
- default fees – that’s a charge you must pay if you fail to meet a monthly repayment. Please note that default fees for payday loans and short-term, high-cost-credit loans have default fees capped at £15.
- early settlement fees – your lender may charge you up to 12 months’ interest charges for paying your loan off early. Many lenders make no early settlement charges to their clients.
Your bank may not be your best option – it pays to shop around
Going to your bank first for a loan might sound like it makes a lot of sense. However, just as in the way that insurance companies seem to punish you with higher premiums for staying with them, so do many banks.
You should compare different loan offers from different providers to make sure you get the very best deal. You can either use a comparison site or, better still, a specialist loan broker.
It may be worth using a personal loan to pay off your current personal debts
Many Brits take out a loan to pay off all of their other existing debts. Why? It’s because an unsecured loan for debt consolidation may mean that you pay off your debts faster and you end up paying less every month to service your debt.
Please be aware though that the longer you take out a loan, the more interest you pay. In some cases, your monthly repayments may be lower but, over the length of the loan, you may end up paying more interest.
PPI is optional if you’re offered it
Following recent scandals, banks and building societies generally don’t offer their customers payment protection insurance (PPI).
PPI was originally launched to cover the cost of loan and other debt repayments if a borrower falls ill, loses their job, or is injured in an accident meaning that they’re temporarily unable to work.
PPI in and of itself is a good idea. It was just really badly executed the first time around. If you want the additional protection offered by PPI, make sure that you shop around and check the terms and conditions so that you know what circumstances they will or won’t pay out in.
You do not need a guarantor – it’s better if you don’t have one, in fact
Guarantor loans require you to find someone willing to pay off a loan if you’re not able to. Your guarantor has to have a good credit rating and be in a good financial position at the time of application.
Guarantor loans are coming under increased scrutiny because of alleged unfairness. Guarantor loans will often charge up to 50% interest to a borrower despite the fact that their guarantor is of good financial standing. It would be a lot cheaper for someone with good credit to take out a loan themselves and offer the person who needs financial help that way.
In an ideal world, it’s better that you don’t rely on anyone else to pay off a loan or take one out for you. Loan Broker can connect people whose credit ratings are poor with no guarantor loan companies.
Why are many loan applications rejected?
We’ve put together a list of the main reasons behind the rejection of many people’s loan applications. The fewer boxes you tick on this list, the better chance you have of getting a loan at the very best rate possible.
Wrong details on application form
Many applications are rejected because a potential borrower makes a mistake on their application form. Please be careful when filling in a form to make sure that all the details you pass to a lender are correct.
Unstable or too short employment history
Lenders like it when you have been able to keep working for the same employer for an extended period. Some may check with your employer that the level of wages you tell a lender that you earn during the application process is correct.
You already have too many loans out
If you have multiple credit cards and loans already, a lender may worry that you’re living beyond your means and that you need debt to support your current lifestyle.
A lender is not happy about why you want a loan
Many lenders do not allow personal unsecured loans to be used for business purposes. They are also less likely to lend to you if they think that, after reviewing your credit report, that you may use the money for gambling or investing.
Not enough income
Lenders like it when there’s a good amount of money left over once you’ve met all your financial commitments at the end of the month. If they think that you will struggle to make repayments because you don’t have much disposable income, they are likely to say “no”. You might want to ask for less money to have a better chance.
Limited credit history
If you’ve never taken out a loan or a credit card before, it’s not bad credit that stops you from successfully applying for one. What might cause a lender to say “no” is that there’s not enough credit history for them to make a decision on whether they think you’ll be able to pay them back or not. You might want to investigate credit-report-building products to get you on your way.
Apply for a loan with LoanBroker
LoanBroker will help you find the right lender for you whether you want to take out a payday loan, short-term loan, home improvement loan, debt consolidation loan, no guarantor loan, short term loan, instalment loan, loan for the self-employed, unsecured loan, small loan, or a homeowner loan.
We don’t lend you the money ourselves – what we do is match you up to the ideal lender happy to provide you with the finance you need. Our service is free – you never pay us a thing – and there’s no obligation to take out the cheap loan that we find for you.
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