1. How are loans Charged?
A personal loan is a lump sum
that you typically borrow from your usual bank, another bank or through a
shop where you are buying a large item, such as a car or washing machine.
You agree to pay back the loan over a fixed number of years (called the 'term')
by making set monthly payments.
There may be an arrangement fee
when you take out the loan.
You can usually pay extra for
payment protection insurance. This pays your monthly payments for you if
you are unable to work because of illness or unemployment. You pay interest
at a fixed rate on the amount you borrow. All the interest charges throughout
the term of the loan and the repayment of the amount borrowed are added together
and then divided into equal monthly payments.
You can pay off a personal loan
before the end of the term. Often, there will be a charge equal to part of
the interest you would have paid had you kept the loan for its full
term.
2. Can I see an example of loan repayments at
different rates?
To understand the potential effect
of different APR's on loans, and different repayment periods we've included
this table as an example:
Interest rate (APR) Term in years
1 2 3 5 10
8% £87 £45 £31
£20 £12
9% £87 £46 £32
£21 £12
10% £88 £46 £32
£21 £13
11% £88 £46 £32
£21 £13
12% £89 £47 £33
£22 £14
13% £89 £47 £33
£22 £15
14% £89 £48 £34
£23 £15
15% £90 £48 £34
£23 £16
16% £90 £48 £35
£24 £16
17% £91 £49 £35
£24 £17
18% £91 £49 £35
£25 £17
19% £91 £49 £36
£25 £18
20% £92 £50 £36
£26 £18
21% £93 £50 £37
£26 £19
22% £93 £51 £37
£27 £19
23% £93 £51 £38
£27 £20
24% £93 £52 £38
£27 £20
25% £94 £52 £38
£28 £21
26% £94 £53 £39
£28 £22
27% £95 £53 £39
£29 £22
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3. What's APR?
What you pay for a personal loan
can be expressed as an 'Annual Percentage Rate' or APR. An APR takes into
account:
- the interest you must pay;
- any other charges you must pay
- for example, an arrangement fee or the cost of payment insurance;
- when and how often you pay the
interest and charges.
You do not need to know how to
work out an APR. The important thing is that APRs show the cost of borrowing
on a standard basis. So you can compare the APR of one lender with another.
The APR also lets you compare
the cost of personal loans with other types of borrowing. A loan with a lower
APR is cheaper than a loan with a higher APR.
The APR does not take into account
charges you might have to pay, such as an early repayment charge if you pay
off the loan before the end of its term.
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4. What are loan terms?
Some loans are restricted to
particular uses - for example, home improvements.
You may be required to open a
current account with the lender, if you are not an existing banking
customer.
You might be required to take
out payment insurance (to keep up the repayments if you are unable to work
because of illness or unemployment). but often this is optional.
Check what charges are made if
you decide to pay off the loan early.
5. What are the risks if I can't repay the loan?
The main risk is that you cannot
keep up the loan repayments.
Some personal loans are secured
- usually against your home. This means that, if you do not keep up the payments,
the lender can sell your home to recover the
loan.
Most personal loans are unsecured.
If you do not keep up the payments, the lender can take you to court. The
court will probably order you to pay off the loan, perhaps in smaller monthly
amounts spread over a longer period or might allow the lender to seize and
sell some of your possessions to recover the loan. You will probably find
it hard to borrow elsewhere if you have a county court judgment against
you.
Disclaimer
The Money Zone provides research
information only and accepts no responsibility or liability for any loss
or damage incurred as a result of relying on information contained on this
website. If you have a specific problem you are advised to consult an
appropriately qualified professional.
SECURITY OVER PROPERTY MAY BE
REQUIRED. YOUR HOME IS AT RISK IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE
OR OTHER LOAN SECURED ON IT.
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