Loans
| If you are thinking of taking out a loan to pay off your debts, you will need to think very carefully about whether you can afford the repayments and whether this is the best option for you. Take a look at our Dealing with Debt section to see what other action you may be able to take to reduce what you owe. |
There are certain times in life when you may need to take out some sort of loan. When buying a house for instance, very few people can afford to pay outright, so most take out a mortgage. Similarly, when going to university, most people need to take out a loan to cover their tuition fees and living costs. This section of the site covers different types of loans, where you can get them and what they’ll cost you.
Types of Loan
Loans can either be secured or unsecured (also known as personal loans). Secured loans may offer you more money and a better rate of interest, however if you do not keep up with repayments the creditor may be able to repossess your home, so you will need to think very carefully before agreeing to this type of arrangement. Secured loans may also have variable rates, while personal loans are more likely to have fixed rates. If you have a fixed rate then you will know exactly how much you will have to pay back each month, whereas with a variable rate, the amount can change depending on whether the lender decides to put rates up. (Read more) It’s really important to consider different types of lenders as the differences in what they charge can be huge. Take a look at the table below, (based on information from DirectGov
http://www.direct.gov.uk/en/index.htm) to show the cost of borrowing from different lenders:
| Lender/Rates | Illegal lender | High cost
credit provider | Doorstep
lender | Credit
Union |
| Ammount of loan | £300 | £300 | £300 | £300 |
| Typical APR | 1000% | 246.50% | 117% | 12.7% |
| Terms of loan (weeks) | 52 | 52 | 55 | 52 |
| Weekly repayment | £55.50 | £17 | £9 | £19.80 |
| Total interest | £2700.32 | £495 | £195 | £19.80 |
| Total repayment | £3000.32 | £884 | £495 | £319.80 |
As you can see, for the same amount of money over a similar period of time, some lenders can charge hugely more than others. The most expensive loan in the table costs more than 9 times what the cheapest costs! The important thing to look at here is the Typical
APR as this shows you how much the loan will cost overall – the higher the APR, the more expensive the loan.
Also beware of companies trying to get you to take a bigger loan than you really need or trying to sell you
insurance with your loan. Never buy anything if you feel under pressure. Take some information away with you and if possible talk it over with someone you trust before you commit yourself to anything.
You may also want to look at our
Buying on Credit section, which gives information about
credit cards and
hire purchase arrangements. Depending on what you need the money for and how quickly you are likely to pay it back, you may find a credit card could offer a better deal. These normally give you a period of time in which you can pay the balance off without incurring any
interest at all, meaning your borrowing is free. You must be sure that you will be able to pay the money back though; otherwise this can be the beginning of a slippery slope that could see your debt spiral out of control.
Credit Unions
Have a look at our Credit Unions section to find out more about joining a credit union. These can be a great option for getting a really low rate of interest on the money you borrow, meaning you don’t have to pay back as much as you may need to otherwise.
Community Development Financial Institutions (CDFIs)
CDFIs aim to provide loans at competitive rates to businesses and individuals who may struggle to get a loan from a bank, building society or other high street lender. They are not-for profit organisations, so they do not aim to make money from their customers. This means they keep costs as low as possible and avoid charging the high APRs associated with doorstep or payday loans. (Read more)
Social Fund Loans
These are loans from the government to help those who have no savings of their own and are in need of money. There are three types: crisis loans, budgeting loans and community care grants.
Crisis loans are for those who are suffering from an emergency or disaster and are in immediate financial need. The amount you get will depend on your circumstances. You will agree a schedule for paying the loan back with your Jobcentre Plus adviser, however it’s worth noting that you won’t have to pay any interest on a crisis loan, meaning you only have to pay back the amount you borrowed. See this link for more information. (Read more) Budgeting loans are to help with less urgent costs such as furniture, clothing or expenses when moving house. You can apply for any amount from £100-£15,000, however again the amount you are given will depend on your circumstances. You will normally have to repay a budgeting loan within 104 weeks; however the repayments are
interest-free which means you only pay back what you borrowed and no more.
See this link for more information.
Community care grants are for those who need help to live independently in the community, or are under exceptional financial pressure. This may happen for instance after an unsettled period in your life, if you have recently left residential or institutional care or if yourself or a member of your family needs help to stay in your home.
See this link for more information.
Facts and Figures
Total UK personal debt at the end of April 2011 stood at £1,452 billion. Individuals currently owe nearly as much as the entire country produced during the whole of 2010.
Banks write off £20.71 million of unpaid loans every day.
The average household in the UK owes £55,854 (including mortgages)
(Figures produced by Credit Action - June 2011) |
Bank Loan
Banks may offer you different types of loans depending on your circumstances. Loans such as a mortgage are a special type of loan which you will need to look into very carefully. It is worth thinking about what it is that you need the loan for, and whether you could wait and save up, or buy cheaper elsewhere. For instance, if you are looking at buying a new car, do you need to get it straight away, or could you save for a few months and avoid having to take out a loan? It is always best to use savings if possible, as it will cost you to borrow money. (Read more) If you decide you do need the car immediately for some reason (for instance to get yourself to work) then you may decide it is worth borrowing the money. In this case it is really important you shop around as much as possible and ensure you’re getting the best deal. If you already have an
account with a bank, then this might be a good place to start as they may offer better deals for their own customers. However, this is not always the case, so don’t be afraid to look elsewhere too before making a decision.
Consolidation Loans
Several companies may offer you a consolidation loan if you are in debt. The idea is that this can be used to pay off all your creditors and leave you with more manageable weekly or monthly repayments which only need to go to one company, making life easier for you. In reality though these can carry high rates of interest, and as you are only paying off a small amount of the loan at a time, you could find yourself still paying years in the future. This is why it’s important to check not only how much you will have to repay at a time, but how much you have to pay overall.
Doorstep Lenders
These are lenders who will come round to your house to loan you money and then to collect payments from you. They are often prepared to give loans to people with bad credit history and often you may know the salesperson, which can make them seem like a friendly and tempting option. (Read more) However, these groups have faced huge amounts of criticism for charging very high rates of interest, which means it is very expensive to borrow money from them. For this reason they are best treated as a last resort if you really cannot get a loan from anywhere else. The government has produced a comparison site for doorstep lenders
http://www.lenderscompared.org.uk/ so if you are considering borrowing from one of these companies you can make sure you are getting the best deal available.
Loan Sharks
‘Loan sharks’ are money lenders who do not have a license from the Office of Fair Trading http://www.oft.gov.uk/. If you are not sure whether someone is a registered lender, you can check here http://www2.crw.gov.uk/pr/Default.aspx can call 020 7211 8608 between 9.30 am and 4.00 pm, Monday to Friday. option. (Read more) Signs someone is a loan shark may include:
- They do not give people any paperwork with the loan. This can make it very difficult to keep track of how much you owe.
- They charge extremely high rates of interest - rates of between 8000% and 117,000% have been uncovered. If you compare this to the other rates shown in our table above, you will see how high this is.
- They use threats and violence to recover money – particularly if payments are missed.
If you have borrowed money from an unlicensed lender then it’s them, not you, who has broken the law, so you cannot legally be made to repay any money they say you owe them. To report a loan shark in confidence, you can:
Visit
http://stoploansharks.direct.gov.uk/index.html for more information or see our
Loan Sharks page.
Mortgages
Most people who are buying a home will need to take out a mortgage. These are complex and you will need to ensure you shop around and take plenty of advice before you sign up. Take a look at our Mortgages section to get you started.
Student Loans
When going to university, most people will need to take out a student loan. There are two separate loans which you can apply for: a maintenance loan to help with your living expenses and a tuition fees loan to cover your fees in full. You won’t have to pay this money back until you’ve finished university and are earning a certain amount which should mean you are able to afford repayments. See our section on Help for Students for more information.