Loans are taken out by many people to help them manage the cost of major expenses for which it has been difficult to save. It is almost always cheaper to use your savings for large purchases rather than a loan. But if you are unable to do this then a loan may be necessary.
Loans are available from banks and building societies, from a variety of doorstep lenders and from Credit Unions. The cost of borrowing will vary enormously depending on a variety of factors.
Personal loans
With a personal loan you borrow an agreed sum and pay it back with interest over a certain length of time (usually one to five years). Interest rates can be fixed or variable. You normally have to stick to a repayment schedule. Personal loans will be either ‘unsecured’ or ‘secured’.
An ‘unsecured’ personal loan means the lender relies on your promise to pay it back. They’re taking a bigger risk than with a ‘secured’ loan, where the lender can take whatever you’ve secured the loan against (like property) if you don’t repay it. So, interest rates for unsecured loans tend to be higher than interest rates on a secured loan.
What does APR mean?
APR stands for annual percentage rate. This figure shows you the actual cost of the loan, as a yearly interest rate. It includes charges and fees as well as interest to help you compare loans on equal terms.
Advantages of personal loans
- You can generally borrow larger amounts than with an overdraft
- You’re free to shop around – you don’t need a bank account
- Interest rates and charges are normally lower than for an overdraft
- You know exactly when the loan will be paid off
Disadvantages of personal loans
- Loans are less flexible than overdrafts
- There may be penalties for early repayment of a loan
- You can’t normally miss a repayment
Points to watch out for
- Don’t borrow more than you need or can afford to repay
- If the interest rate is variable, make sure you budget for possible increases
- Consider whether you need to purchase payment protection insurance
- Compare interest rates, APR, terms (like charges and penalties for paying the loan off early) length of repayment periods available.
- Shop around for the best dealThe Financial Service Authority (FSA) has an online calculator to work out typical monthly repayments. See Useful Websites
Other types of loans/lenders
Credit unions
A credit union is a profit sharing, democratically run financial co-operative which offers convenient savings and low interest loans to its members. The members own and manage their credit union themselves.
The three main aims of a credit union are:
- To encourage its members to save regularly.
- To provide loans to members at very low rates of interest.
- To provide members with help and support on managing their financial affairs (if required).
Payday loans
There may be better ways of sorting out a short-term money problem so think about alternatives before you borrow. Payday loans are short term loans for small amounts of money they are easily available from high street shops or internet sites but have VERY HIGH interest rates. Usually you will be given up to a month to pay back the money you borrowed, plus interest. See link below for further information.
Doorstep lenders
Doorstep lending is usually offered to low income households or people with a poor credit rating who might find it difficult to secure a loan from another lender.
They are able to borrow small sums, often as little as £100, in cash over short periods of time, but are charged large amounts of interest. They repay the money on a weekly basis to a local agent who calls.
Can you afford to borrow?
Whether borrowing through an overdraft or a loan, you need to be sure you can afford the repayments. If you fall behind with payments your situations will quickly spiral out of control.
More information can be found on the web sites below.
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