The deal you are offered will depend on your credit rating. Those lenders who offer a flat rate of interest will refuse to lend to borrowers unless they have a particular credit rating. Other lenders – those who use “personal pricing” – tailor the interest rate they offer according to the borrower’s credit rating.

Secured loan

This type of loan, often known as a second charge mortgage, is only available if you are a homeowner, or, less usually, have some other valuable asset. The lender has a right to repossess the asset and sell it to get his money back if you do not make the repayments in accordance with the agreement. Clearly, putting your home at risk is a less desirable option than going for an unsecured loan. However, if you have a poor credit history you may find unsecured loan lenders reluctant to lend to you, and choosing a secured loan may be your only option.

The monthly repayments may be less than an unsecured loan, because you will be able to borrow over a longer period (but, see below).

The rate may be variable rather than fixed, so it will fall and rise with interest rates in the general economy. You may, therefore, find your monthly payments rising to an amount higher than you can afford. The temptation may then be to renegotiate the loan over a longer period. If you do this more than once, you could end up in a lifelong spiral of debt.

You should, therefore, be very careful if you choose a secured loan that you do not put your home at risk.

Before you start looking for a loan:

Check your credit file

It is a good idea to make regular checks on your credit file, whether you need to borrow or not. This is to make sure that any other borrowing you have had in the past that has been paid off is shown as cleared, and that all the records on your file are correct. You should pay particular attention to unfamiliar entries on your file, which could indicate ID theft. If you find evidence of a loan agreement or mobile phone contract that you have never entered into, you should take immediate action.

Before you apply for a loan, check your file and get a feel for the sort of credit risk you are.

 

How much can I borrow?

Received wisdom says “only borrow what you need”. This is good advice, because when you are applying for a loan it is tempting to add on a few hundred – or even thousand – pounds for a few treats and extras. You need to remember that it must all be paid back, with interest, and usually the more you borrow the more you must repay.

There is, however, one exception. This is where smaller sums attract a higher rate of interest than larger ones. In this case, why not borrow a few pounds over the limit to get the lower rate? But don’t go and spend it! Save the borrowed money that you don’t need in a high-interest account, and use the interest to help with the loan repayments.

How to compare loans

The best place to start is a loans comparison service, such as Moneyextra. You can use the calculators to find out which is the right deal for you.

Make sure you do not apply for more than one loan at a time because, if you make several full-scale applications, they will show up on your credit record and could indicate multiple refusals, harming your record for the future.

If you are refused credit, don’t apply again until you have found out why. If you have not already done so, check your credit record. You can ask the lender who refused you why they have done so. Lenders are not legally obliged to tell applicants why they have been declined, but most will do so.

If you know you are a good credit risk – for instance, you know you are a responsible person with no outstanding debts – but you are failing to be granted a loan on a credit-scoring technicality, such as not being on the electoral roll because you have recently moved house, or you live in rented accommodation, you may have better luck approaching the bank where you hold your current account for a loan. It will have details of your financial habits on file, and can make a more personal assessment of your credit profile.

What do do it you are refused credit

What figures to look for when comparing deals

Oddly enough, the two figures you should ignore when choosing a loan are the annual percentage rate (APR) and the monthly repayments. Both figures can be misleading. The APR can be manipulated, and the monthly repayments for two loans with the same APR will be completely different if the length of time you take to repay each loan is different. Remember, the longer you take to repay, the greater the total interest that you will pay will be, even if the monthly repayments are smaller.

Particularly avoid being caught by terms such as “typical APR”. This means that that is the rate that a majority of people borrowing from that lender are granted. It also means that the lender uses individual pricing, based on your credit score, so the “typical APR” figure is totally meaningless. You need to know the rate the lender will offer you.

The best figure to use when deciding whether you are getting a good deal or not is the “total cost of the loan”. This will include all interest payments and charges. It will also show you how the total amount that you will repay will change if you work out payments over different periods. Compare the total costs of two loans over identical periods to see which one offers the best deal.

Fees and penalties

Look out for the various fees and penalties attached to any loan you are considering. You may be charged for special arrangements, such as receiving a cheque or bank draft instead of a bank transfer. Many lenders will charge you an early repayment fee if you repay the loan in full before the agreed date. If you think you might be able to clear your loan early, and would like the facility to do this, avoid loans with early repayment fees, or make sure you include them in your calculations.

Payment Protection Insurance

PPI is insurance cover that ensures that your loan payments are met if you are unable to make them, such as when you have had an accident, been off sick or become unemployed. The sale of PPI alongside loans is the latest scandal being investigated by various financial watchdogs, including the City regulator, the Financial Services Authority. The problem has been that many PPI polices have been overpriced, purchase has often been obligatory in order to secure the best deals, and cover has been mis-sold, because exclusions in the policies have meant that borrowers have been unable to claim on the policies when they have needed to.

PPI can be a useful form of insurance, but if you are considering taking out a policy to cover your loan, make sure you get a quotation for the loan with and without PPI included. Check out whether you could get a freestanding PPI policy more cheaply, and make sure that you read the policy small print to ensure that you are covered for anything that could happen to you. For instance, PPI rarely covers the self-employed or those on temporary contracts for job loss, so this type of policy would not be suitable for anyone seeking cover in the event they were unable to find work.

Debt consolidation

A word of warning on debt consolidation: while it may seem convenient to have one monthly payment going out of your bank account, instead of lots of little bits and pieces that are hard to keep track of, only go for debt consolidation with your eyes open.
The normal rules apply, as they do for other loans.

Look at the total amount repayable. If you consolidate your debt apparently to make monthly repayments easier, you may find you are repaying a much greater amount overall, because the debt has been restructured over a far longer period, and you could find yourself trapped by the debt with little chance of getting free of it.

Are you trading unsecured debt, such as credit card and personal loan debt, for secured debt which could put your home at risk? If you are having problems with making unsecured debt repayments, talk to a credit counselor, such as Citizens Advice or the Consumer Credit Counselling Service www.cccs.co.uk and try to get your existing debts rescheduled, rather than putting your home on the line. Never pay for debt advice.

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