Quick guide to personal loans
Did you know that personal loans are also referred to as unsecured loans? What different emotions those two names invoke. The word ‘personal’ is endearing enough, but ‘unsecured’ makes it sound like a rather dubious proposition. But rather than drawing conclusions from the name itself, it makes sense to get a better understanding of what personal loans in the UK – a £26 billion a year industry - actually entail before considering if they are right for you or not.
What is a personal loan?
Personal loans are a means for borrowing money from a bank, building society or authorised lender for just about any purpose. As a borrower, you’re in a position to choose both the amount you wish to borrow, and the period over which to pay it off. In the UK, the minimum amount you can borrow is £1,000, and the maximum is usually £25,000. The available loan terms typically range between 1 – 7 years.
The interest rate at which you pay off the loan will then be determined once the amount and term have been finalised. Yet the best-value APRs tend to result from loan amounts between £7,500 - £15,000; paid off over periods of 3 - 5 years.
Repayments are usually made on a monthly basis, comprising a capital and interest amount, and are structured in such a way that the loan is guaranteed to have been paid off if repayments are made timeously. Also, after being approved for the loan application, and subsequently paid out, you will be allowed a 14-day ‘cooling off’ period in which you can cancel the agreement.
What is the difference between a secured and an unsecured loan?
Secured loans are a very different animal to unsecured loans. In the case of secured loans, the lender will offer the loan, provided it is asset backed; usually by the borrower’s car or property (a mortgage is the most common type of secured loan). This collateral acts as security for the lender if the borrower misses payments and/or defaults, as they will then be able to repossess the borrower’s asset(s) in order to recoup their losses.
In the case of an unsecured loan, anyone is potentially eligible to receive one, as there is no such collateral afforded to the lender. As a result, interest rates could be higher for personal loans in order to compensate the lender for taking on this added risk.
The importance of credit ratings
Some borrowers are more likely to pay off their debt than others, and this is determined by their credit rating – a score based on the person’s credit activity over the previous six years. The higher the score, the lower the APR should be that is attached to the loan, and vice versa. Different credit providers will have different rules and criteria for vetting loan applicants, and for determining the rate they will be charged, but credit rating is the single biggest determinant of all – particularly with regard to personal loans.
It is also thus in the borrower’s interest to make their repayments on time, as any arrears and/or defaults will be recorded in their credit file for up to six years, thus affecting their ability to get affordable credit in the future. In addition, the defaulting borrower will be liable to whatever recourse has been outlined by the lender in the terms and conditions originally set out in the contract.
You can get hold of your credit file from any of the big three credit agencies in the UK (Equifax, Callcredit and Experian), or for from a credit score tracker like Noddle, who provide it for free. Take note though that scores may differ across agencies.
What are the advantages and disadvantages of unsecured loans?
Personal loans are a quicker and more convenient way of getting your hands on a loan. With online platforms such as ours, you can have the money in your bank account within two working days of applying if successful. The application process itself is generally quite expedient too, without much in the way of required paperwork or red tape.
You also have far more flexibility with a personal loan, and not just in terms of the amount you borrow and the loan term. You are generally able to make overpayments and early settlements with your lender – sometimes without incurring any penalty fees, as is the case with Lending Works. Some providers may also offer the option of payment holidays in the early stages of the agreement.
In terms of disadvantages, some providers of unsecured loans have a reputation for fleecing their customers with regard to hidden charges, and interest on small amounts. Representative APRs may also differ immensely to the one you are quoted for in both your initial personalised loan quote (soft search), and the one in your final application, so extra vigilance is required on your part.
However, the main drawback of a personal loan, as alluded to above, is the dependency on your credit score. You will be hamstrung by any blemishes on your credit file – potentially for a long time – which could mean you either are unable to get a personal loan at all, or are forced to pay it off at a high rate of interest. Although there are no miracle cures to a bad credit score, there are at least some handy quick fixes that you can make in order to optimise it.
Choosing your personal loan
Once you have optimised your credit score, it is time to shop around in order to get some personalised loan quotes. Price comparison sites are one way of scouting personal loan providers, as is Google. Bear in mind that there are other elements to a good borrowing experience besides value as well. This is where peer-to-peer lending platforms have come to the fore, offering a smooth and convenient online service, with quick approval times, near-immediate funds transfer and excellent customer service.
Nevertheless, when you’ve found your potential candidates, be careful to check that a quote from a given website won’t leave a footprint on your credit file (it should specify either way on the site somewhere in the vicinity of the loan calculator). Gather as many quotes (soft searches) as you can in order to ascertain which lender is likely to give you the best rate. Be selective when going ahead and applying after this as, once again, you do not want to leave a footprint on your file, and show signs of being too credit hungry by applying with multiple platforms.
Once you know what your APR and repayment terms will be, ask yourself some honest questions. Will I be able to afford this? How much pressure will the repayments put on my monthly budget? Do I feel justified in taking out this loan? Will I be able to make the repayments for the duration of the loan? If the answers are positive on all four fronts, you’re good to go. And don’t harbour too many doubts about your decisions.
At Lending Works, the loans we have written have had a hugely positive impact on the lives of our borrowers. From making value-adding home improvements, buying a car and consolidating debt, to getting a pilot’s licence, covering the costs of cosmetic surgery or having dream weddings abroad, those who have taken out a loan with us have made proactive, life-changing decisions, and been left with affordable repayments on terms that they are comfortable with as a result. So if you think a personal loan could be the sensible answer for you too, then it’s time to start getting the wheels in motion.
For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
The Lifetime ISA (LISA), announced in 2016, would prove to be one of George Osborne’s last flagship gestures to UK savers and investors as Chancellor, eventually launching against a backdrop of anti-climax a year later in April 2017.
As the tax year end approaches, the financial services industry readies itself for a flurry of activity. That's in large part because, with just a couple of months to go, the so-called 'ISA season' is upon us.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Loan underwriting is the process that we undertake to analyse all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets our minimum loan criteria. As part of that process all data is verified, analysed and summarised to paint a picture of each applicant.
When you earn interest from a regular bank savings account, for example, the bank automatically deducts basic rate tax (currently 20%) before paying your interest. With interest earned from peer-to-peer lending, tax is not deducted automatically so lenders will need to declare their income to HMRC.
As 2018 draws to a close, with our bellies full of Christmas turkey, it's only natural to look back on the past 12 months and reflect. No doubt, it's been a turbulent one economically and politically, and not everyone has had it all their own way.