Personal loans – the importance of shopping around for a customised
solution
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 reme mber that any loan repayment problems are likely to
be captured in your credit record/history, which will later impact on any
other borrowing.
About Author:
Rachel writes for the personal finance blog Cashzilla:
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