Personal Loans Guide

Personal loans (or unsecured loans) is a method of borrowing money from a bank or building society, which you can use for any legal purpose (even though most lenders stipulate that the loan should not be used for commercial purposes). You choose the amount you wish to borrow and the period of time you want to repay the loan over, and the rate will be set accordingly. You then make regular monthly repayments to pay back the full amount of capital plus interest.

As each repayment includes an element of both the capital and interest, you are assured to repay the loan at the end of the term, provided that you make all the payments on time.

Different loan types

Unsecured personal loans are usually available for between £1,000 and £25,000 over the terms of one to seven years. You are not required to put your house or other property up as security.

Secured loans work the same way, but are secured with your property, so you run the risk of having your home repossessed if you do not make the repayments.

Specific loan types, like home improvement loans and car loans, are just unsecured personal loans that go by another name.

How lenders make their money

Loan providers earn money in three ways:

  1. Interest – You are required to pay a rate of interest on the loan which represents the lender’s profit on the loan itself.
  2. Fees –set-up or arrangement fees are charged by some loans. If you want to repay the loan early, you may be charged an early repayment fee, and if you miss a payment, you can expect a missed payment fee to be charged.
  3. Associated products – other products may be offered by lenders, such as payment protection insurance generates an income for them.

What next?

How much do you need to borrow? Choose how much money you really need to borrow and the term of the loan. The primary rule is to borrow as little as possible and pay it off in the shortest amount of time.

How to Understand Credit Card Charges

Being charged with credit card fees make spending more expensive than it needs to be. Here is a guide on everything that you need to know regarding what they are, how much they could cost when they are charged, – and how to avoid them.

What are credit card charges?

Even though using a credit card can cost you nothing if you are responsible. Credit card providers earn their money through a variety of fees and charges that they can include onto your balance. These include:

  • Annual or monthly fees that come with some cards
  • Interest if you use the card to borrow money
  • Charges for using extra features like withdrawing cash, using the card abroad and balance transfers
  • Fees for breaching the terms of your account, such as exceeding your credit limit, not using the card, or making late repayments

Interest charges

The principal cost of a credit card is typically the interest rate, which is charged if you make use of the card to borrow money.

When you receive your bill every month, you can decide on how much you repay (although your provider will determine a minimum amount). If you opt not to repay the full amount, interest is charged on the balance.

For example, if you left a balance of £200 on a card with 20% APR, it would accrue interest of £40 each year.

You can dodge paying interest on your credit card by paying your balance in full every month. If this is not possible, you can pay less by finding a card with a lower APR.

Monthly and annual fees

Most cards come without annual fees, and some waive them during your first year.

Some credit cards charge a fee that you have to pay monthly or annually. These fees commonly cost from £12 to £150 per year.

If you have a monthly fee, it will be added to each credit card bill, so you will pay the fee as long as you make at least the minimum payment.

For example, if you had a card with a monthly fee of £4 and repaid £50 a month, £4 of this would pay off the fee and £46 would go towards the interest of the card and clearing the balance.

Annual fees are usually added to your bill every year in the month that you took out your credit card.

Late payment charges

When you receive your credit card bill every month, it will specify a minimum payment amount and a date when you need to make the payment by.

If you do not pay this by the due date indicated, you will be charged a late payment fee of about £12. Some providers also charge this every time a cheque, direct debit, or other payment type bounces when you pay them.

The easiest way to avoid charges for late payment is to set up a direct debit in order to pay at least the minimum amount every month.

Missing a payment can also have an effect on your credit rating and influence your provider to increase your interest rate or withdraw an introductory 0% APR offer.

Charges for exceeding your credit limit

Credit card providers designate a credit limit, which is the maximum amount that you can owe on your card at any point.

For example, if your credit limit is £3,000 and you carried over an outstanding balance of £1,000 last month, you will exceed your credit limit if you spend more than another £2,000.

If you go exceed your credit limit, you will be charged a fee of about £12 by your provider.

You can avoid this by checking your credit limit and monitoring how much you have spent on your card every month. You can check current spending and your limit by using your card issuer’s mobile app, signing into your online account, or talking to your provider.

If you are sure that you are likely to spend too much before the end of the month, request your provider to increase your credit limit.

If you accidentally go just over the limit, talk to your provider immediately because they may allow to let you off. It may help if you volunteer to make an immediate repayment to bring your balance back within your limit.

Dormancy fees

Some American Express store cards and credit cards charge an inactivity fee if you go too long without using the card.

For example, a provider could charge £20 for every 12-month period that you do not spend on your card and if your balance remained unchanged.

Although not all cards charge dormancy fees, analyse your terms and conditions or ask your provider if you do not use your card regularly. If you have a card that you do not use and you will be charged for inactivity, consider cancelling your card.

Cash withdrawal charges

Using your credit card at an ATM can be very expensive since you will be hit by three principal charges:

  • Higher APR: The interest rate that is charged on cash advances will normally be higher than your APR on purchases – usually around 27.9% or more.
  • Withdrawal fee: This is charged as a percentage of the amount you take out. This is typically about 3%, although there is usually a minimum fee amount of a few pounds.
  • Immediate interest: An interest will be charged on the amount that you withdraw straight away, whereas normal purchases on your credit card are interest-free until after when your bill is due, often more than 50 days later.

For example, if you withdrew £100 from a cash machine via a credit card and paid it back after 36 days, you could be charged £5.52 in fees and interest.

Charges for spending abroad

If you make use of your credit card abroad, it could charge you with a loading fee of about 2.99% every time you spend. Meaning a charge of £2.99 for every £100 you spend.

The funds will also be transformed into the currency of the country at an exchange rate that is expected to be less competitive than the rates you get when you get travel money as cash.

Taking cash out abroad can be even more expensive since you will be charged interest on the amount withdrawn immediately – typically at a rate of 27.9% or more. You will also be charged for ATM withdrawal fee of about 3%.

However, cards that are designed for use abroad can come without fees for spending or withdrawing cash. You could also think about other ways to spend abroad like prepaid cards, travellers’ cheques or cash.

Balance transfer charges

When you take out a credit card for a balance transfer or a money transfer or, you will normally have to pay a handling fee to make the transfer.

This fee is determined as a percentage of the balance that you want to transfer. For example, if you transferred a balance of £2,000 to a card with a fee of 2.5%, this would cost £50.

You can save by comparing cards and picking one with a low fee – some balance transfers even come with no fee at all.