How much can I borrow?
Offered by most banks and other lenders, including peer-to-peer companies where you borrow directly from other individuals, you can borrow up to £25,000 with an unsecured loan. If you need any more you will have to find a lender that offers secured loans, where your borrowings are set against your home.
With a secured loan your home is at risk and may be repossessed if you fail to keep up monthly repayments. Secured loans also have variable rates, which means lenders can suddenly increase your monthly payments without you being able to do a lot about it.
Unsecured loans, on the other hand, have fixed rates. This means you will know exactly how much you repay each month for the term of your loan.
What kind of rate can I expect?
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Lenders use a strategy called risk-based pricing. This means the rate you will see advertised is a ‘typical rate’, while the rate you actually receive will be based on your credit score. If you are rated as higher risk, you will be charged a higher rate. However, by law, at least two-thirds of successful applicants must be offered the typical rate. If you have a particularly poor credit score you are likely to be rejected by lenders altogether.
Is there anything I can do to improve my credit score?
Firstly, apply to see your credit record through Equifax and Experian. It will cost you £2 for a profile print out, which should show which part of your credit history is letting you down. The other big agency, Callcredit, offers a free credit-checking service at noodle.co.uk.
If you believe any of the information is wrong, you can get the credit reference agency to flag it as “disputed” and consult the company that provided the information.
Maintaining your presence on the electoral roll helps, as banks and building societies usually like to know that all information held about you is up to date before they are willing to offer credit. Credit reference agencies update their details from the electoral roll every month.
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Lenders are increasingly sharing borrowing data. If a lender can see you are heavily indebted or have access to many other lines of credit, they are unlikely to offer you a loan or a good interest rate. You should also try to reduce other debts, such as credit and store cards and hire purchase agreements and cancel any cards you no longer use.
How long should I take to repay my loan?
As a general rule, the longer your loan term, the lower the rate of interest. A longer loan could, however, work out more expensive in the long run as you will be charged interest for a greater period of time.
For example, if you borrowed £5,000 for five years on a rate of 5 per cent, your monthly repayments would be £95 and you’d end up paying back £5,647 in total - £647 in interest.
By contrast, if you cut the loan term to three years your monthly payments would increase to £150 for a total repayment of £5,386. That’s a saving of £261 over the lifetime of the loan.
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Be aware that lenders may levy hidden fees, including charges for repaying your loan before the agreed term is up.
I’ve heard shopping around for the best loan is not a good idea?
Using the ‘scatter gun’ approach, and applying for multiple loans to try and get the best deal is inadvisable. Each time you apply for a personal loan or credit card, a “footprint” is left on your credit file, regardless of whether you go on to take the credit or not.
Lenders can be turned off borrowers who have applied for loans from multiple banks - it gives the impression that the borrower is desperate for credit, and therefore a risky customer. If, for example, you want one £5,000 loan, don’t apply for four just to see what rates you will be offered. Lenders will simply see a customer applying for £20,000 of credit.
A much better idea is to use a loan comparison tool on sites such as Moneyfacts or MoneySuperMarket.
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All the personal loan rates are too steep, is there anywhere else I can borrow money?
If you want to borrow money short-term, for 12-months or less, a zero interest credit card may be your cheapest option. When you make a purchase, you have the length of the introductory offer - which can be more than a year - in which to pay back the money you owe without any interest.
Peer-to-peer lenders such as Zopa, Funding Circle and RateSetter match people with money to invest with borrowers who need a personal loan. By cutting out the middlemen lenders can get a return that beats normal savings rates, and borrowers can raise funds at a lower rate of interest.
My credit score is terrible. Are loan sharks my only option for a cheap loan?
Loan sharks should be avoided under all circumstances as the loans they offer are never cheap.
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If you are stuck, consider joining a credit union. These are independently-run co-operative organisations that aim to assist those who may not have access to financial products and services elsewhere.
All credit unions pride themselves on not having any hidden charges, early repayment penalties and include life insurance for the loan as standard. Most offer a rate around 13 per cent, but never more than 27 per cent and lend up to £10,000. Lengths of loans tend to be five years, sometimes ten.
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