In the recent difficult times, cash-strapped consumers are increasingly turning to lenders, in order to raise funds. There are many issues to be considered, in order to find the loan that is suitable for you. Here are a few key points to consider, when planning to apply for a loan.
Secured loan or unsecured loan?
When a loan is secured this means that the borrower has offered the lender some form of security against the debt. This is usually a property, and secured loans are most commonly made to homeowners and secured on their home, hence the name homeowner loans. As the loan is secured, it is generally possible to borrow larger amounts, and secured loans of up to £100,000 are possible.
An unsecured loan, or personal loan, is not attached to any form of security, and is offered based only on the creditworthiness of the borrower. As a result, it is a more risky loan for the lender and unsecured loans tend to be less than £15,000 and offered only to those with a very good credit record.
What interest rate?
Most lenders have a policy of ‘risk-based pricing’ which means that different interest rates are offered to different customers, depending on their credit record. Lenders will have a ‘headline rate’ which is their lowest interest rate, available only to those with an excellent credit score. They also have a higher rate of interest known as their ‘typical rate’, which must be offered to 66% of all approved customers.
Fixed or variable interest?
It is crucial to understand that most secured loans have variable rates, which means that the lender can raise the cost of the loan at any time. This was a particular problem for many loan customers during the credit crunch, with some lenders actually doubling their interest rates.
Imperfect credit? Take action before you borrow
If you have an imperfect credit record, there are various ways to improve your chances of obtaining a loan.
You can ring the credit companies you are currently dealing with, for your credit cards or your mortgage, and request that they add a note to their records to explain why you were late or had problems with your payments.
Other actions which will enhance your chances of getting loan approval include ensuring your current payments for credit cards and bills are on time, establishing a fixed address, and adding your name to the electoral register to confirm your domicile and identity.
Payment Protection Insurance (PPI)
Payment Protection Insurance or PPI is insurance which covers your loan repayments, if you are unable to work due to an accident. Historically, PPI was sold by lenders at the same time as the loan was taken out, but because of widespread mis-selling the Financial Services Authority ordered providers to desist from selling it in this way, from the end of May 2009. With PPI, it is particularly important to understand the exclusions contained in the small print of the agreement, and customers are well advised to have their financial adviser go through this with them, if they are considering taking out cover.
