Loans Hints & Tips

To Loan or not to Loan

Loans can be a sensible way of borrowing a substantial amount of money for something in particular. Many people would choose to take out a personal loan to purchase a car or just to consolidate a number of other smaller debts into one monthly payment. When making your decision we would like to point out a few things that may prompt some questions to your potential lenders. I think we all realise that rate is a common comparison to make between loans but what about other factors?

Firstly, what is the difference?

Personal Loan
This is a loan up to £25,000 that has been offered on the basis that you are able to repay within the agreed schedule with no extra security. Most personal loans have a fixed payment schedule so your debt will be paid off within a set period as long as you meet the repayments. Each lender has their own credit scoring that consists of their ‘wish list’ for a ‘good risk’ client based on your personal circumstance. Most lenders will also use information from credit reference agencies who will advise if you have a history of bad payment or a CCJ for example. The lender may increase the interest rate offered to compensate themselves if you are judged as a higher risk.

Note: Some lenders will offer ‘flexible’ loans that allow you to make under or over payments and take repayment holidays within certain terms. These are great flexible functions but if your money discipline is bad it may not be the best thing for you. Beware that if you make under payments or take repayment holidays you will lengthen the period of the loan and may end up paying more interest dependant on the lenders terms.

Secured Loan
This is a loan offered with your home as security if you cannot keep up repayments. You can borrow more than £25,000 dependant on the equity in your home so even though the lender will use a similar credit scoring they will take into account the added security of your home. Many people use this type of loan to make expensive home improvements that may increase the value of your home or alternatively you could reschedule your mortgage to borrow more which is usually a much more complicated exercise but may be appropriate.

Note: Because the loans is secured on your home you may find a cheaper interest rate but the consequences of not being able to keep up repayments are much more serious. Putting all your unsecured debts into one secured long term loan may be a good way to manage your finances but don’t use it as a green light to build up credit cards and overdraft’s again.

Hints and Tips
‘Payment Protection’ is usually available to cover you in the instance of unemployment/long term sickness/critical illness/death. These types of policy are linked to the loan agreement only and will not cover any of your other financial commitments. If this is what you require you may need to speak to a financial advisor about an ‘Income Protection’ plan that would provide a set amount each month if one of these events occurred.

You have to be prepared to take responsibility for any borrowing you undertake. Although there are regulations to ensure that lenders offer credit responsibly, the suitability of the agreement depends largely on you providing all relevant information. Go forth and make an informed decision…

The opinions expressed are those of the author only. The material is for general information only and does not constitute legal, financial or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation by an FSA authorised company where the market is FSA regulated.