Need a loan for a new car, home improvements, to pay for your daughter's (or your own) wedding, or to take the holiday of a lifetime? For whatever reason you need an immediate cash boost an unsecured personal loan could fit the bill. But, there are literally thousands of loans on offer, and lenders market their products aggressively, so how do you chose the best deal and what should you look out for in the small print?
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An unsecured loan is just as likely to be called a 'personal loan' - they are one and the same. 'Unsecured' simply means that when you borrow the cash you don't have to offer any security or collateral such as your home or other assets which would otherwise be at risk of re-possession if you failed to make the necessary repayments. Back to Top
Lenders make their decision on whether to lend you money by checking into your personal credit history. If you are applying for a loan from your own bank they will use their own records, but they will also run a credit check to determine your credit rating with a credit reference agency.
If you are applying for a loan from a company where you are a new customer, they will rely on this credit check to ascertain whether you are an acceptable risk.
This is also known as 'credit scoring', and its basic purpose is to assess the probability that you will be able to meet the loan repayments bearing in mind your other financial commitments.
Keep in mind:
There are very strict rules regarding information obtained from credit reference agencies to ensure your privacy is respected. Other than in exceptional circumstances, for example in cases of suspected fraud or money laundering, information should not be disclosed without your permission. However, by making a loan application you are effectively giving this permission. Back to Top
A lender's credit scoring system allocates points for each item of relevant information, for example whether you are a homeowner, your employment status and income, and adds these up to produce a score.
If your score reaches a certain level then the lender may agree to your loan request.
If you do not score highly enough, your application may be turned down.
Lenders generally have their own points system, although sometimes scores are calculated by credit reference agencies and these may be used by the lender to judge your application.
Keep in mind:
Lenders are not obliged to accept an application, but a refusal does not necessarily mean you are marked down as a bad risk. It simply means that based on the information available, the lender you approached is not prepared to lend you money. It may be that you do not fit the profile of the potential customers they are trying to attract.
However, lenders have different lending criteria and scoring systems, and so an application to another lender might prove successful.
(N.B Information regarding race, gender, disability, colour and religion is not used) Back to Top
A credit reference agency holds financial and publicly available information about individuals, which it takes from a variety of sources, such as banks, credit card providers, retail stores and building societies. It also holds information from the law courts - for example if you have a county court judgement or are a declared bankrupt - and from the electoral roll.
They are not Government organisations but they are regulated under the Consumer Credit and the Data Protection Acts to hold information about individuals, which is deemed to be relevant to lenders. Agencies only hold information - they do not interpret data or give an opinion on an individual's financial status.
Each time a search is requested by a lender it will be noted on your credit file and disclosed to potential lenders in future credit checks. A lender should always inform you if a credit reference check is being carried out, and you should also be told if information about you is to be stored with a credit reference agency.
Keep in mind:
If you have had no previous credit issues a credit check should be very straight forward and you should be eligible for the majority of unsecured loans. However, if you have no credit history at all and this is the first time you have applied for a loan you may encounter problems with some lenders as they like to see a proven track record. In such cases, it is important to be on the electoral roll and the lender may also ask you for further personal information. Back to Top
Yes, you can obtain a copy of the information held at a credit reference agency by writing to any of the following (or by applying online) for a statutory £2.00 fee.
Consumer Help Service, PO Box 8000
Nottingham, NG1 5GX
Telephone: 0870241 6212
Credit File Advice Centre, PO Box 1140,
Bradford BD1 5US
CallcreditBack to Top
PO Box 491
Leeds LS3 1WX
When they send out a copy of your credit file, the credit reference agency should include details of what you can do to rectify any information that is incorrect.
If you question the information with the credit reference agency they will mark it as unreliable pending further investigation, but the quickest and best solution is to write to the organisation that has supplied incorrect information and ask them to amend it, particularly as they can then correct it with all three credit reference agencies. Back to Top
Yes, some unsecured loans are available to people with a poor credit rating, and even to those who have county court judgements, and you may still be able to borrow money. However, you should do some soul searching and consider whether you are being irresponsible in taking on more debt, particularly as you may have to pay a higher interest rate than if your credit rating was good. www.yesloansuk.com and www.best4loans.co.uk both advertise that they will consider applicants with a poor credit rating, the latter claiming interest rates are from 6.2%. which is a good rate in today's environment.
Keep in mind:
If you find yourself in difficulty with debt, now or at any time in the future, consult one of the free independent counselling services rather than a commercial organisation. The best starting point is your local Citizens Advice Bureau (www.adviceguide.org.uk for details of your nearest branch); National Debtline (www.nationaldebtline.co.uk 0808 808 4000) or the charity Consumer Credit Counselling Service which specialises in unsecured debt problems (www.cccs.co.uk 0800 138 1111).Back to Top
If your application is unsuccessful, the lender should tell you why, including whether you failed to score highly enough in the credit scoring system. You could try another lender (see How does credit scoring work? above).
You can also approach the lender that has turned you down and ask them to reconsider and/or ask if you can appeal against a refusal of credit based on their credit scoring system. It is likely a 'real person' will then review your application as opposed to automatic selection or rejection based purely on a credit scoring system.Back to Top
You could just apply to your bank or building society for an unsecured loan. This may seem the simplest option, and the interest rate may be competitive, in which case your bank is certainly worthy of consideration, but the big banks are rarely the cheapest option.
You can use one of the online comparison websites to find the cheapest loans. Make sure you compare like with like and look at the APR (annual percentage rate). With unsecured loans the interest rate is generally fixed for the 'life' of the loan so the monthly repayments always remain the same.
Which lender offers the best rates will depend on how much you want to borrow over what period of time. For example, the best interest rate on a £5,000 loan over three years is from Masterloan at 5.7%, and Abbey and Northern Rock at 5.8%. If you want to borrow £10,000 over five years the lowest rate is again from Masterloan at 5.7% and Cahoot at 6.1%. Back to Top
Although the interest rates on personal loans are fixed for the duration of the loan, they are influenced by the level of interest rates in general, particularly the Bank of England's Base Rate. This is currently 4.75%. You will not get a loan at this rate, but the nearer you can get to it, the better. The best rates on offer are currently around 6% (see How do I find the best unsecured loan? above). Back to Top
Sometimes shops, such as furniture or electrical retailers offer interest-free credit on major purchases such as a new three piece suite or upmarket television, and car dealers will sometimes have these offers on brand new cars. Genuine interest-free credit deals are hard to beat, but acceptance is not guaranteed - expect to be 'credit scored'.
Keep in mind:
Although interest free credit deals can be great, make sure you keep up with the repayments. Failure to do so could result in interest being applied at a punitive rate. The same applies to 'buy now, pay later' deals that are a favourite with some furniture retailers. If you fail to begin repayments on time, it's likely interest will be backdated to the beginning of the loan agreement, which could add hundreds of pounds to the cost.Back to Top
If you want to borrow money over a relatively short term for, say, a specific purchase then an interest-free credit card is a real possibility. Several cards currently offer 0% on new purchases for a limited period.
Current top buy is Marks & Spencer's &More card offering 0% on new purchases for 12 months, followed by Sainsburys Bank Visa offering 0% for 10 months, and a handful of others, including Nationwide, Halifax and Bank of Scotland for 9 months. These are the top deals for new purchases - if you wish to transfer an existing balance, then other cards may offer 0%.Back to Top
Unsecured loans sometimes have early repayment penalties, should you wish to pay off the loan before the end of its term. For example, Masterloan charges a fee equal to one additional month's interest on the balance outstanding at the time you pay off the loan.
You should also look out for payment protection insurance (PPI). This is sometimes automatically added to the cost of monthly repayments by lenders and can inflate the cost of a personal loan by an astronomical 694%. Even the cheapest insurance cover - from Northern Rock - hikes up the monthly repayments on a £5,000 loan over three years from £151.43 a month to £165.59.
PPI is controversial, not just because it can be very expensive. The idea behind it is that it covers your loan repayments should you be unable to do so, for example because you lose your job or become too ill to work. However, policies tend to be littered with exclusions, from bad backs to mental illness, and are often sold to those who cannot benefit from the cover, for example redundancy insurance is useless to someone who is retired or already unemployed.
Keep in mind:
Early repayment penalties can also be very high on PPI, as well as on the loan itself, which means anyone wishing to pay off their debt early will have to stump up far more than they anticipated. Back to Top
When comparing loans, look at the monthly repayments including insurance, as the difference between the cheapest and most expensive PPI policies from lenders is up to 150%. Better still, if you would like to take PPI and are sure you can benefit from the cover, look at a 'standalone' policy rather than one from the lender. For example, web based insurer Britishinsurance.com offers standalone cover for as little as £4 a month per £100 of loan repayment.Back to Top
ZOPA is a sort of eBay for loans. It is an exchange that allows individuals to borrow up to £25,000 from other individuals and advertises rates from as low as 4.9% APR, although the rates quoted for a £3,000 over two years were considerably higher. Borrowers are credit scored and rated A*, A, B or C, depending on how risky they are judged to be, but ZOPA lends only to those who score relatively highly and the lower your score the higher the interest rate you will pay. For example, if you wanted a £3,000 loan over two years, an A* rated borrower would pay 6.2% (monthly repayments if £133.20 or £150.90 with insurance), rising to 12.3% for a C rated borrower (£140.89 monthly repayment of £160.23 with insurance).
With ZOPA, there is no early repayment penalty and it is worth considering if you are a borrower, though it is harder to see the attraction for lenders.
Keep in mind:
ZOPA acts as a 'broker' but it collects and chases up repayments on behalf of its lenders and employs a debt collection agency. For lenders the exchange is free to join, but borrowers pay a 1% commission on the amount of the loan. Back to Top
If you cannot keep up the repayments on your loan, and you have no insurance or your claim is invalid, contact your lender straight away. Do not 'bury your head in the sand'.
Call the lender and discuss the situation. They may be prepared to come to an arrangement with you. If you are in real difficulty see I have a bad credit rating. Can I still get an unsecured loan? above.Back to Top
It depends on the nature of your complaint. If you are unhappy with the terms and conditions of the loan, The Office of Fair Trading will investigate; if you think the lender's advertising was misleading, complain to the Advertising Standards Authority and if you are unhappy with the service provided by a bank or building society first complain to the lender and, if you are dissatisfied with their response, refer your complaint to the Financial Ombudsman. Back to Top