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?
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.
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.
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
||Total cost assuming 7.00% APR
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.
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
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.
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.
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
), equal to £30.00
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.
||Ongoing Annual Commission
||Up to 5%
To find out more about commissions and how they work, read the Candid Money Guide to financial advice here.
Here's some of the more common loan jargon you might come across:
|Secured Loan||A loan where you have to offer the lender security (e.g. your home) in case you can't keep up payments.
|Student Loan||A government loan for qualifying students, offers a subsidised rate of interest linked to the rate of inflation (RPI).
|Unsecured Loan||A loan where you don't have to offer the lender security (e.g. your home) in case you can't keep up payments.