loans

Interest rates

The unsecured loan market is very competitive at the moment and, for those applicants with good credit ratings, interest rates being charged are pretty much at an all time low of under 6% APR.

Unsecured loans typically range from £500 or £1,000 up to a maximum of £25,000 and the repayment term varies from 6 months or 1 year up to a maximum of 5 to 10 years
Bear in mind

If you extend the repayment term in order to make the monthly repayments rather more manageable it will also result in dramatically increasing the amount of interest that you end up paying.

When comparing loans make sure that you concentrate on the APR rather than any flat interest rate.

Many providers charge a lower interest rate on loans above £5,000, so bizarrely it can be cheaper to borrow £5,000 than £4,900.

The interest rate advertised by a provider has to be available to two-thirds of successful applicants. If a loan is not offered, the unsuccessful applicant is not included in the two-thirds calculation. This is important because it reveals the two different strategies that may be chosen by a provider.

* Some providers – typically those who regularly appear in best buy tables – will advertise a low interest rate, and, as a result, are likely to decline rather more applicants.

* Other providers will advertise a higher interest rate in the expectation that they will be able to accommodate a greater number of applicants at that rate.

From this you will note that your credit rating will dramatically affect whether you are offered a loan and, if so, the interest rate that you are offered. Every time you apply for a loan a search is added to your credit file even if the application is unsuccessful.

Channel of application

Some providers will differentiate between the rates that they charge dependent upon the method of application with an internet application sometimes enjoying a lower rate than someone who applies via a branch.

Interest Rate Type

The vast majority of unsecured personal loans have fixed interest rates but it is important to check the basis of any loan in which you are interested.

Fees

The majority of unsecured loans do not charge any set up fees provided that you plan ahead. Aside from Payment Protection Insurance (which is dealt with in the next paragraph) some providers charge up to £45 for instant delivery by CHAPS direct to your bank account. This delivery charge can be avoided if you’re able to wait three or four working days for the loan to be transmitted via BACS. With some providers it will be necessary to explicitly opt out of CHAPS delivery in order to avoid the charge.

Loan providers are very keen to sell Payment Protection Insurance (PPI) to their customers and you should expect a hard sell on this if your loan application is successful. Typically PPI will cover accident, sickness and unemployment but it is important to note that actual cover may vary widely between different policies. As will the cost. PPI cover is worthwhile for certain customers but bear in mind that the loan provider will earn substantial commission if you take out their PPI offer. With some providers it is more a case of opting out of their PPI cover rather than opting in.

Early settlement charges

If you repay the loan early you may be liable to an early repayment penalty on the amount repaid: this varies from nothing up to the equivalent of two months interest. Make sure that you understand any possible penalties prior to taking out the loan. If you think that you may be able to repay a loan early choose a product that that does not levy an early settlement charge.

Alternatives

There are a variety of other ways of borrowing money from mainstream providers and these include overdrafts, credit cards, increasing your mortgage or taking out a secured loan.

Overdrafts can prove to be expensive and you may also incur additional charges. If you choose this route make sure that you arrange an authorised overdraft by agreement with your current account provider first.

Many credit card providers advertise 0% introductory deals on balance transfers for a period of six or nine months. By all means take advantage of such offers but bear in mind that the 0% offer:

* is only for a short period and, at its expiry, may be difficult to roll over into another 0% deal elsewhere so the interest rate charged may then become very much higher
* a balance transfer fee, typically 2% to 3% of the balance, will often be charged
* the amount that you are offered as a balance transfer may not be as high as you want.

Increasing your mortgage or taking out a secured loan:

This might at first glance seem an obvious solution but do bear in mind that:

* your home will be the security for the loan
* it will probably mean that you will be repaying the loan over a very much longer period so it will end up costing a lot more in interest
* there will probably be fees involved if you increase your mortgage.