What is a personal loan?
- Often referred to as an unsecured loan.
- A loan is a financial contract in which one party (the lender) agrees to give another party (the borrower) a specific amount of money to be repaid monthly over a set period of time. Attached to the loan are interest payments at an agreed rate.
- Borrowing is based on your personal credit rating. You can borrow up to a maximum of £25,000 with a HSBC Personal Loan, or £50,000 with a HSBC Premier Personal Loan, over 8 years.
Which loan is right for you?
There are four 'main' types of loan: debt consolidation, home improvement, car and special occasion (which usually refers to weddings and holidays).
Before choosing a loan consider the following:
- Don't borrow beyond your means - make sure you're certain you need the loan and you can also afford the repayments.
- Check the APR first and find out if you have to pay an arrangement fee to set up the loan.
- Check if there is an early repayment fee and make yourself aware of any repayment holidays available.
What if I have a poor credit history?
If you have had problems in the past with credit or currently are experiencing financial difficulty then you may think you'll struggle to find a loan but there are loans for bad credit available.
What is credit history?
You must have a credit history to get credit - sounds strange to those who have never borrowed before, how are you supposed to get started? You can build your credit score in a number of ways, not just through big financial products but getting a mobile phone contract or paying car insurance will also build your credit history.
How do I deal with debt?
Getting into debt can be a stressful experience but keeping calm under financial strain will help you to effectively manage your debts:
- Analyse your money: keep a record of where your money goes each month.
- Prioritise your spending: split the amount you spend into monthly essentials and luxuries, only spend on the luxuries when you know you have the disposable income available to do so.
- Stick to the budget you set: get into the habit of checking how much you spend on a daily basis to ensure you don't overspend.
- Consolidate your debts: by taking all your outstanding debts and bringing them together into one loan, this makes it easier to keep track of all your repayments.
- Seek advice: if you struggle to stick to a budget or your essential outgoings are more than your income, then it's important to seek help.
How do I ensure I can make the repayments?
- Look at the Total Amount Repayable (TAR) rather than the APR. Only borrow the amount you need to and keep the term of the loan as short as possible.
- Make sure you have a budget set. If you miss a payment then contact your lender immediately and keep copies of all the correspondence between you and your lender.
What should I watch out for?
You want to agree to the most desirable terms possible so always read the small print, as these can include some of the following:
- Prepayment penalties: lenders are within their rights to charge a fee for repaying a loan before a certain date.
- Accidental overdrafts: if you link your loan for automatic payments then you run the risk of going into an unarranged overdraft and will be charged an overdraft fee.
- Scam artists: before you sign up to any sort of loan, particularly online, check the organisation is legitimate first.
Glossary of terms
The percentage of customers who are successful in their loan application.
Adverse credit rating
A bad credit rating.
Stands for Annual Percentage Rate. Encompasses the interest rate and other charges you'll have to pay such as arrangement and annual fees which lenders are obliged to include in the interest rate they advertise. This means you can use APR to compare the true costs of different loans.
The advertised APR that will be offered to at least 51% of customers who apply and are accepted for a personal loan.
Bank of England
The central bank of the UK, responsible for setting the base interest rates for the economy.
Factor used by lenders to assess your ability to manage and repay your debt. The higher your score, the more likely you are to be granted a loan.
A record of an individual's financial borrowing, including information about late repayments and bankruptcy.
Credit reference agencies
Hold and pass information onto lenders seeking details on an individual's credit history.
Where various existing debts are transferred into a single loan.
When a borrower fails to keep up with their loan repayments.
If you want to pay your loan off early this is called an 'early settlement'. Under the Consumer Credit Act lenders have the right to charge a one off payment for repaying the loan early.
Fixed interest rate
A set interest rate that cannot go up or down during the period of the loan.
Your income before any deductions are made.
The increase in the price of goods and services in the economy over a period of time.
The amount you are charged for borrowing money. This is a percentage of the total amount of the loan and varies based on individual circumstances.
A contract between the lender and borrower stipulating the terms and conditions of the loan.
The key requirements an individual must meet before they are eligible to apply for a loan, for example age or income level.
During the period of the loan you may decide you want to pay back more than you originally agreed with the lender. This is called an overpayment.
Allows you to take a break from making the monthly payments for an agreed period.
Occurs when a lender offers different customers different interest rates based on individual circumstances. Most lenders use a person's credit score, employment status, income and other outstanding debts but the process varies between lenders.
A loan that uses an individual's asset, usually their property as equity. The amount offered is dependent on the value of the asset.
Total amount repayable
The total amount you are required to repay during the loan term including interest.
A loan that isn't secured against a borrower's property. There is usually a maximum amount an individual can borrow.