Personal Loans

The purpose of this hubpage will be to discuss what a personal loan is, how it works and where to get one. Surprisingly given the economic environment there are still lenders out there that are looking to lend money unsecured. The market has changed and we will explain what this means in more detail. Lenders are being cautious, however this doesn't mean that you still can't get a very good deal for a personal loan!

A personal loan is a loan to an individual. Normally this would not be secured against any asset such as a vehicle or property. Typcially lenders will lend between £1000 up to around £75,000. The normal terms that they will lend over will be between 1-5 years. There are a large variety of UK lenders in the marketplace and it is important to consider the effect that your credit rating will have on your ability to get finance.

Your credit score is made up of a number of factors including: your current facilities you have arranged, including overdrafts, credit cards and loans. Your usage of these facilities, so if you are continually going over your overdraft or over your credit limit on your credit cards you may struggle to achieve the headline rates. The amount of applications for finance that you have made. Finally the record of payments that you have made, in terms of how many of these have been on time etc.

It is important to ensure that you maintain the best possible credit rating that you can. If you forsee that you are going to experience financial difficulties it is recommended that you contact your lender to discuss this with them, as lenders will often arrange payments plans or other means of collecting the money, and this may reduce the effect on your credit profile.

Also it is important to consider other records that may affect your credit score, including gas and electric, phone bills and mobile phones. Each of these is a credit agreement and if you do not meet the required payments this again can potentially affect your credit score.

Just to identify how much of a difference a good credit score can make, I recently conducted a survey with some of the largest lenders in the UK, and to borrow £7000 over 3 years was between the following APR's. 7.7% being the best and 69.9% APR being the highest interest rate. The difference in tptal interest payments was around 8 times! Meaning that if you were only able to get funding through the lender with the highest interest rate you would be paying 8 times as much for the pleasure!

Some lenders may also offer rate for risk products. This means that if you are not an "A" scoring customer, they may increase the interest rate for the loan which means that you could end up paying significantly more.

Therefore it is extremely important to understand your credit rating and to make sure that you are aware of any outstanding finance that may be recorded in your name. Please get a free credit check by clicking here.

The amount of lending which has been taking place has significantly reduced in all areas, and personal loans have certainly not been immune to this. Lenders are looking for security and secured loans do not provide this. As liquidity has returned to the market more and more lenders are slowly opening their doors to lending money again after a period of around 12 months where very little took place.

What does this mean?

Well unfortunately if your credit profile is not good you may not be able to borrow money from some of the "prime" lenders. They are likely to reject applications for funding if you have recent slow payments on your credit file. There are other lenders known as "sub-prime" lenders whose numbers have reduced significantly. Many of these lenders have pulled out of the marketplace either completely, or they may only have a limited amount of funds to lend. This means that the number of loans being completed within the sector has dropped significantly. However, without lending banks and other financial institutions do not make any money, therefore sooner or later they will have to return to this to ensure that they are profitable for future years.

It is extremely important to understand exactly what you are getting when taking out a personal loan. By law lenders are obliged to provide the APR which means the annual percentage rate of the loan. This is a calculation by which all loans are measured to ensure that there is a fair way of consumers understanding if they are getting a good deal.

However it is also important to consider the following things:

- Acceptance fees - Some lenders charge upfront fees for acceptance of the facility.

- Postage fees - Some lenders will charge up to £50 if you want the funds quickly, it is important to consider how much of a difference this will make.

- Termination fees - Lenders will charge different amounts to payoff the loan early, again it is important to understand any penalties that you may incur here.

- Payment protection - Many lenders make significant profits through the sale of Payment Protection Insurance (PPI). We would always recommend that you shop around for a PPI policy as this can reduce your premium by up to 70%.

If you take out a loan agreement it is your responsibility to ensure that you are able to meet the monthly repayments. If you are struggling to meet the repayments it is important to communicate with the lender. For example if you have lost your job the lender will be much more considerate if you contact them and explain the situation rather than avoiding this.

If you are unable to meet the repayments this will lead to a record of a slow payment profile on your credit record. After a period of time the lender will record a default against you, with a County Court Judgement (CCJ) being the final act. This is where a lender records in court that there is an outstanding amount owed to them, and this can significantly affect your chances of getting funding in the future.

One way of ensuring that you are able to meet the repayments should anything happen is by taking out a payment protection insurance (PPI) policy. This can ensure that if you are to lose your job, or are taken ill for a period of time the payments may be met by the insurer.

As previously mentioned it is important to shop around for these policies as often the lender will not provide the cheapest option for these. Also, it is important to consider the exclusions of the policy, so for example if you take out a policy that meets the repayments if you are made unemployed then this would not be of any benefit if you are self-employed. Pre-existing conditions are generally an exclusion as well so it is well worth making sure that the policy is suitable for your needs.

A personal loan is an extremely straightforward way of raising some cash, be-it for that holiday that you have wanted, household repairs, or for buying that new car you've wanted!

The important things to consider are as follows:

- Fixed rate of funding - The interest rate is determined at the outset and you are aware of the monthly payments that you will need to meet. This means that you can budget to ensure that you can afford the payment.

- Once completed then there is no further requirement.

- Interest rates can be very cheap. Recently they have increased slightly however it is still a cheap way of funding compared to credit cards, although sometimes secured loans can be cheaper due to the increased amount of security that the lender would have.

Good luck with selecting your product, remember always shop around to find the best deal as there are still many lenders in the marketplace with money to lend!