personal loan guide

Banks and building societies and other lending institutions are keen to compete for our business because there is big money to be made from personal loans. When we borrow money, be it on a mortgage or credit card or bank overdraft, the lender makes profit from the interest charged.

The interest rate applied is known as the Annual Percentage Rate (APR), and your first consideration when arranging a loan is to compare the APRs of different products as a means of determining how competitive they really are.

If it's presented as a monthly rate of interest, look for the annual equivalent, which will allow you to compare it with other lenders.

There's a wide variation in the rates available - and there's nothing to be gained by paying any more than is necessary.

So don't think that just because your own bank or other lender says it has a special offer for customers this is going to be the best available.

There's nothing to stop you going elsewhere - and there's every reason to shop around as widely as possible.

When you're looking at interest rates, it's also important to consider any other factors that might be making them cheaper. For instance, a 'secured' loan might have a lower interest rate but it will represent a much higher risk, because if you default on repayments you could lose your home.

It is not unusual for lenders to offer different APRs depending on the method of application e.g. applications by telephone may receive a higher APR than those done online, so it's well worth shopping around for the best deal.

If you are looking for a low cost loan, comparing the APR is always a good place to start. Lenders do quote interest rates in different ways, and it's worth familiarising yourself with these before you start.

If your loan is a truly flexible product then you may also be able to withdraw funds from the account on a rolling basis, providing you stay within your credit limit.

Lenders also offer repayment holidays or payment breaks, allowing you to take a break from your monthly repayments either at the start of the loan (known as 'deferred repayment') or at an agreed point during the term.

Interest will continue to accrue on the outstanding balance and this may result in increased monthly payments so your debt is still repaid over the term agreed at the outset.




AM I PROTECTED BY LAW WHEN I TAKE OUT A PERSONAL LOAN?

Personal loans - both secured and unsecured - are governed by the Consumer Credit Act 1974.

The Act contains strict regulations about how money is lent and covers unsecured loans up to £25,000 (these are known as 'regulated loans').

When taking out a personal loan you will be asked to sign a credit agreement, and you'll be bound by its terms.

If you get into difficulties when repaying your loan, be sure to tell the lender promptly. It will usually be possible to arrange a different loan repayment schedule, although there may be additional penalties for this facility.

But the very worst thing is to do nothing. Remember, if you miss monthly repayments this will ultimately affect your credit record. And an impaired credit history can be a nightmare to sort out.

SHOULD I TAKE OUT INSURANCE TO COVER MY PERSONAL LOAN REPAYMENTS?

If you're weighing up the possible benefits of insurance, there are a number of aspects to consider.

Make sure that the insurance being offered is appropriate to your particular needs. Many policies will have regulations stating that you can't claim for up to 60 days after losing your job or getting sick.

There can also be clauses stating that you lose any benefits if you work for even a single day, so any temporary work you do to pick up some extra money will render your insurance useless.

Reading the small print on a loan contract is particularly important if you're self-employed or on a fixed-term contract.

On close inspection, you might find that you're not covered if your self-employed work dries up or your employment contract isn't renewed.

You might even find that you're not covered if you fall ill and are unable to work. Banks won't tell you this when you sign on the dotted line, but they'll have no problems telling you when you come to make a claim.