10 things to watch for when applying for a loan
Sep 13, 2006
1. Typical APR
The 'typical' APR is the rate at which the lender expects 66% of customers to receive when applying for a loan. However, that means that 34% (almost one third) of all applicants would only be offered a higher rate or may be refused completely if they don't meet the lender's criteria. Meeting the criteria is based on your own personal circumstances, how much you earn and your credit history.
2. Payment Protection Insurance (PPI)
When you are given a quote for the monthly repayments on a loan, many lenders will quote a figure inclusive of payment protection insurance (PPI represents good commission for lenders if sold in addition to the loan itself) so ensure that you ask the lender to split out the cost of PPI so that you can determine how much both the loan and the insurance will cost you as separate entities which can assist you in finding out if there are any cheaper 'stand alone' payment protection policies out there. In addition, by splitting out the costs, this also prevents the practice whereby the PPI cost is sometimes added to the amount borrowed whereby interest is then charged on both the loan and the PPI.
3. Fees
Ensure that you ask whether or not the figure quoted includes all administrative costs. Some lenders may charge you for administering the loan and filling out the application forms on your behalf. They may charge you for costs incurred in obtaining your credit report, closing the application, transferring the funds into your account etc., so it is important to find out the 'bottom line'.
4. Length of deal
Crucial when calculating repayments on all loans but especially when using a loan for debt consolidation purposes. You may get a monthly repayment figure which is far less than what you're currently paying, making it seem like an attractive proposition but the length of time you need to make repayments can mean that you're paying more over the long-term. It is, therefore, important to do the calculations and to work out exactly how long the loan runs for to enable you to work out exactly how much you are going to have to repay over the full term of the loan and whether or not that represents the best solution.
5. Early repayment charges
Repaying a loan in full before the end of its term would appear to be a great idea in practice for both you and the lender but you need to be aware that the loan may have charges associated with paying off the balance early. To complicate things further, different lenders use different terms when speaking about early repayment charges. It may be referred to as an early repayment penalty, an early redemption fee, a redemption charge or a financial penalty. Whatever the lender calls it, it's important to know which loans apply a charge and which don't as the penalty can add a considerable cost to the loan and can even increase, the earlier you repay the full debt.
6. Repayment holidays
Lenders will also entice consumers by offering them repayment holidays or repayment breaks allowing you to take a break from your monthly repayments either at the start of the loan period (known as deferred repayment) or at an agreed point during the term. Consumers need to be aware that interest during these 'breaks' will still be accrued on the outstanding balance and may result in increased monthly repayments so that your debt is still repaid over the term agreed at the outset.
7. Fixed or variable rate
Personal loans come with both fixed and variable rates. Fixed rate loans are better for people who have a definite fixed income coming in each month and wish to pay a fixed amount they feel is affordable across the entire term of the loan. Variable rates can sometimes save you money but are subject to economic changes so it is important that you budget in the event that interest rates rise. If that occurs, so your monthly repayments will rise accordingly which means the savings you were attracted to in the first place, may not materialise at all.
8. Is security required
If you want to borrow a large sum of money, then a secured loan is usually the best option. Where unsecured loans tend to be offered up to £25,000, a secured loan worth up to £100,000 - and sometimes more, can be made if the lender has collateral to offset the risk of lending higher amounts of money. You should certainly benefit from reduced interest rates on a secured loan over an unsecured loan and you will be able to repay the loan over a much longer period. However, it is worth remembering that your home could be at risk if you do not keep up repayments on a secured loan and it is usually only the best solution for borrowing larger sums of money.
9. Credit history
If you have a blemish on your credit history such as a CCJ (County Court Judgement) or have missed repayment dates on other borrowing arrangements, you may find that the interest rate quoted for an unsecured loan will be far higher than you envisioned as the lender may deem you to be 'high risk'. In many instances, you may not even be eligible for an unsecured loan. However, if you own your own home or, at least, have a mortgage on a property, you will find a secured loan much easier to come by as you are placing collateral on the table which reduces the risk to the lender. The advantage of this is that you will enjoy lower interest rates as a result but the pitfall is that you may lose your home if you do not keep up repayments on a secured loan.
10. Single or joint application
It is possible to make a single and a joint application for a loan. Whilst this can sometimes increase the amount you are able to borrow, there are also other implications. Firstly, if either party has a negative financial history, CCJs, late repayments, defaults on their records etc., it can adversely affect the credit rating of the 'less risk' party, so care should be taken when considering a joint application. Also, with a joint application, it requires the signature and consent of both parties and with that comes the risk of either party being pursued should the repayments not be maintained and only one of the applicants can be traced. In that instance, lenders will actively pursue the remaining party should they have difficulty tracing both applicants which can sometimes result in one party being held responsible for a joint debt.
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