Personal Loans

What Types of Personal Loans are Available?

There are a number of different types of personal loans available, each of which offer their own advantages and disadvantages. The main types of personal loans:

• Secured or unsecured personal loans
• Fixed or variable interest rates
• Short term or long term repayment periods

There are also a number of specialised personal loans available to certain groups of people, for example:

• Student loans
• Loans for people with poor credit ratings

Secured V Unsecured Personal Loans

Unsecured personal loans allow you to raise up to £25,000, with repayment periods up to seven years.

The main advantage of unsecured personal loans over secured personal loans is that your home and/or personal assets are not at risk if you do not keep up with the loan repayments.

The main disadvantage of unsecured personal loans is that you typically pay higher interest rates because the risk is higher for the lender.

What is APR?

APR means Annual Percentage Rate, and this is the rate of interest that will be applied to your loan. It represents the amount of interest that would be charged over the length of a year.  This makes interest rates more comparable across personal loans with different interest rates and repayment periods. Note that the actual interest charged on your loan will typically be calculated on a daily basis, not on an annual basis.

Typical APR means that the actual APR will depend on your credit rating, and will therefore not necessarily be the same rate as the interest rate advertised.

What is PPI?

PPI means Payment Protection Insurance.

PPI is intended to cover your monthly loan repayments in the event you are unable to work due to sickness, accident or unemployment. PPI can also cover you in the event of your death, by repaying the outstanding loan amount.

You should check the terms and conditions of the PPI policy you are considering, prior to entering into the agreement, to make yourself aware of exactly what you are and are not covered for.

Should I take out PPI?

Loan providers are often keen for you to take out PPI, since it reduces the risk of you defaulting on your loan repayments, and also they may receive a commission on the sale. You should keep this in mind when considering whether to take out PPI.

Deferment Periods and Repayment Holidays

Deferment periods are where the lender gives the borrower a period of time between the drawing of the loan and the first loan repayment. The deferment period is typically between one and 6 months.

Repayment holidays are periods during the course of the loan where no loan repayments are made.  For example, some lenders may not require any repayments to be made in January, since this is often a difficult time for borrowers after the Christmas period.

The downside of these features is that interest continues to accumulate during the deferment period or repayment holiday, resulting in higher interest charges over the course of the loan.

Early Repayment

Repaying a personal loan early can save your hundreds or even thousands of pounds in interest charges.

Under the terms of the Consumer Credit Act an early repayment penalty of one month’s interest is payable. This applies when the original term of the loan is more than one year and the advance is £25,000 or less. For loans with repayment terms of one year or less, no redemption penalty is payable.

Where you are refinancing, you should take this penalty into consideration in your calculations, since you may find it more worthwhile to remain with your current financing situation.

What if I cannot make the Repayments?

Where your personal financial circumstances change, and you find yourself struggling to make repayments, you should speak to your loan provider as early as possible. This is the best course of action, since it is often in the lenders best interests to reach a compromise which suits your changed personal circumstances.

There are a number of organisations offering free independent advice for those struggling to make repayment.  Some of these organisation are:

• Citizens Advice Bureau
• Consumer Credit Counselling Service
• National Debtline

Certainly, the worst course of action is to ignore the situation, in the hope that the problem will resolve itself.  Missing repayments is likely to result in excessive charges being imposed by your bank or loan provider, and this will adversely affect your credit rating.

Personal Loans V Overdrafts and Credit Cards

If you are looking for a short term source of finance, then you may find it more flexible to use an overdraft or credit card, since these can be repaid over a period to suit you, and can be drawndown in stages, as and when you need it. 

Note however that these sources of finance often involve higher APRs, and the outstanding balance may be repayable on demand.

Other Sources of Finance

If you are looking to take out a personal loan to purchase something, you may find that some retailers offer the product on interest free credit.  You will find this is a cheaper source of finance, provided you repay the loan amount within the agreed term. Beware that the retailer may charge you a higher price for the product when offering it on interest free credit, as a way of financing the interest free credit they are offering.