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Personal Loans


What are they?

Personal loans provide you with money today that you pay back over an agreed period, usually up to 10 years. The rate of interest, hence the monthly repayments, is usually fixed although some have variable rates. The monthly payments include interest and a repayment towards the sum you borrowed.

These loans are readily available from banks, building societies and finance companies. Loan interest rates tend to be higher than mortgages but lower than credit cards, although they vary widely between lenders, so shopping around is essential.

The minimum amount you can borrow is typically £1,000. If you borrow over £25,000 you'll normally need to be a homeowner and secure the loan against that.


What types are there?

UnsecuredSecured

The majority of personal loans under £25,000 are unsecured. This means you don't have to give the lender security (e.g. your home or car) against the loan, so there's less chance of losing your property if you cannot keep up the repayments. However, that's not to say a lender can't take legal action over an unpaid debt and try to seize property from you, it's just a more long winded process compared to a secured loan. Interest, hence repayments, on unsecured loans are usually fixed.


Features

OverpaymentsPayment ProtectionRepayment Holiday

Some lenders allow you to pay more than your usual monthly payment, which could reduce your loan term and overall interest payment. This can be a good idea if you have spare cash, but always check that any penalties are not prohibitive and that it does reduce the term of your loan - else overpaying would be of no benefit.


What costs can I expect?

InterestEarly RepaymentArrangement Fee

The interest charged on unsecured personal loans tends to be fixed for the loan term, meaning fixed monthly payments. If variable, you could be at the mercy of markets and the lender, making it harder to budget for repayments.

When looking for a deal you'll notice that lenders quote a 'typical' Annual Percentage Rate (APR). This is the rate that must apply to at least two thirds of applicants, so the rate you're quoted could be higher. The rate you end up with will largely depend on your credit rating. The better your credit score the more likely you'll get a decent rate (because the lender thinks it's unlikely you won't pay them back).


How does the loan term affect the total cost?

For a given rate of interest, the longer the loan term the more it will cost you. This is because you'll be paying interest for longer.

Total cost of a £5,000 loan over different periods
Loan Period Total cost assuming 7.00% APR
1 year £5,192
3 years £5,558
5 years £5,940
10 years £6,966

It's not quite as bad as it seems, because the longer the loan the more inflation will reduce the cost of your repayment's in today's terms. However, given it's unlikely inflation will be higher than your loan interest then your loan will still be costing you money in 'real' terms and shorter periods are normally cheaper overall.


Student Loans

If you're a full-time student you may be eligible for a Government student loan. Students who started a course before 1 September 2012 pay interest at the lower of inflation (RPI) and 1% above bank base rates, which is a pretty good deal. But students starting thereafter pay inerest equal to inflation plus an extra 3% interest while studying and must pay up to an extra 3% thereafter if their annual earnings exceed £21,000 (equivalent to an extra 0.15% per £1,000 above £21,000). While probably still cheaper than a commercial loan, the extra interest added to inflation could see the amount owed swell over time.

The inflation rate used is the annual March Retail Price Index (RPI). It normally applies from 1 September to 31 August each year.

Pre 1 September 2012 loans: Current annual rate of interest rate is 1.50%.

Courses starting from 1 September 2012: Current annual rate of interest is 3.60% plus up to an extra 3%.

There are two types of loan:

Tuition Fee LoanMaintenance Fee Loan

Tuition fee loans cover up to the full amount you're charged for annual tuition fees, currently up to £9,000 a year. It's paid directly to the college or university.

You can receive 65% of the maximum maintenance fee loan regardless of your household (i.e. including parent's) income, your eligibility for the rest depends on the level of income.

Payback

Your first repayment is due the April after you leave your course, calculated as 9% of any earnings above £21,000 a year (£15,795 for courses pre 1 September 2012). If you're employed then repayments will automatically be taken from your salary, while if you're self-employed and/or receive income from savings/investments you must declare this via a self-assessment tax return and make loan repayments accordingly.

Candid Example Ed Sorted graduates from university and gets a job paying £25,000 a year. His loan repayments over the year will total £360 (£25,000 - £21,000 x 9%), equal to £30.00 per month.

Find out how much your initial repayments might be and how long it could take you to pay off the loan using the Candid Student Loan Repayment Calculator.

Should you be in rush to pay off your student loan? If you have other, more expensive, debts then better to focus on paying them off first. Else if your earnings mean you're being charged interest on top of inflation then perhaps worthwhile trying to clear the loan if you have the means. Note: any outstanding loan will be wiped after 30 years, so may not be worth making extra repayments unless your earnings are such you'll repay it in full anyway.


How much commission do they pay?

If you buy a loan through an adviser or saleman they'll usually receive a commission from the lender for the sale. The highest commissions tend to be paid on the most uncompetitive rates. Always shop around to see whether you can get a better deal elsewhere, especially by going direct to a lender.

As PPI is mostly sold through internal salesforces it's difficult to establish the typical commission rate. However, compare an expensive quote to cheaper one direct from an insurer and commission will probably account for much of the difference.

Typical commission
Product Type Initial Commission Ongoing Annual Commission
Loan Up to 5% None
GAP Insurance Around 50% None

To find out more about commissions and how they work, read the Candid Money Guide to financial advice here.


Jargon

Here's some of the more common loan jargon you might come across:

JargonMeaning
Secured LoanA loan where you have to offer the lender security (e.g. your home) in case you can't keep up payments.
Student LoanA government loan for qualifying students, offers a subsidised rate of interest linked to the rate of inflation (RPI).
Unsecured LoanA loan where you don't have to offer the lender security (e.g. your home) in case you can't keep up payments.