Most of us have been in a position at some point when we simply have
had insufficient funds to pay for something. This could be car
insurance/repairs, course fees, holiday, Christmas presents, electrical
items or even the weekly shopping. According to Credit Action, 2.4
million personal loan agreements were recorded in the first quarter of
2005, totalling £13.5 billion. The national debt education charity
reported that 30% of the personal loans were for cars, 24% for home
improvements and 20% for debt consolidation. The total outstanding
balance for personal loans reached £93 billion by March 2005.
Personal loans can help you out of a difficult period when cash-flow is
restricted, but don’t go for the first one you find or you may find
that your loan becomes a lifetime commitment and lifetime strain. There
are numerous personal finance comparison websites available for
personal loans including moneynet, moneyfacts and lowermybills.
In their consumer loans guide, moneynet advise that as a general rule
of thumb, the more you borrow – the cheaper the rate of interest. For
example, a loan of £1,000 may carry an interest rate as high as 20% -
reportedly justified by the lenders because of the relatively high
administration costs associated with arranging a loan. For larger
personal loans, lenders might only charge interest rates of around 6%.
Personal loans fall into two categories: secured and unsecured.
Unsecured personal loans are the most popular, as secured loans may
jeopardise the borrower’s property or other asset. Secured loans are
arranged on the assumption that the borrower puts up a form of security
to the lender, typically the borrower’s property. This allows the
lender to take ownership of the asset should loan repayments be
jeopardised. Whilst the prospect of losing your home may seem like a
major disadvantage, the benefits of a secured loan often allow you to
borrow more money at a lower rate of interest.
Despite such benefits however, most people are reluctant to lose their
home and therefore take out unsecured loans because of this.
When reviewing personal loans and researching the cheapest loan on
offer, you should be aware that you need to investigate the terms and
conditions, as well as the annual percentage rate (APR). Note that if
your credit history is poor – then the terms of the loan may reflect
this. Do your homework on redemption penalties and any other charges
which might be associated with your loan. Some lenders will also offer
payment breaks (deferred payment) either at the beginning of the loan
period, or perhaps during the term, but again read the terms and
conditions and check that excessive interest will not accumulate over
any break periods.
Personal loans in the UK are governed by the Consumer Credit Act 1974,
but remember that you are ultimately responsible for borrowing a given
sum of money and that once you sign a credit agreement, you are bound
by the terms and conditions.
If you are finding the repayments challenging, always tell the lender
as soon as possible and remember that any loan repayment problems are
likely to be captured in your credit record/history, which will later
impact on any other borrowing.
Resources:
http://www.moneynet.co.uk/loans/index.shtml (loan comparisons)
http://www.moneynet.co.uk/personal-loan-guide/index.shtml (personal loan guide)
