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.

Can you Afford a Mortgage?

Before buying a home, examine whether you can afford the cost of a mortgage. Here is a guide on how to check if lenders will accept your application and if you can be able to keep up with the repayments.

Check if you can afford a mortgage

To work out the amount you can afford to spend for a home, you need to consider:

  • Your outgoings
  • Your total income

Deduct your outgoings from your income to determine how much you can pay for a mortgage every month. You can then dodge getting one with repayments that you cannot afford.

You can determine how much you can spend on a home with the use of a mortgage cost calculator. Just type in the mortgage amount, interest rate, and the mortgage term to check how much repayments will cost.

Verify if you can afford the mortgage by comparing the calculated amount to how much you can afford to pay every month.

 

Will lenders accept your mortgage application?

Lenders have to carefully review your financial circumstances before they can grant you a mortgage. The rules of the Financial Conduct Authority’s (FCA)  means they have to ensure that you can keep up with the repayments.

To determine how much you can afford to repay, they will have to look at:

  • If you are in permanent full-time employment
  • How much you earn
  • Your outgoings and the things that you spend your money on
  • If you have people that financially dependent on you, i.e. children
  • Your outstanding debts

Lenders will also base their judgment on:

  • Your credit history: This informs lenders how much your outstanding loans are and how well you have handled debt in the past.
  • Your age: If you are close to the retirement age, you may only be offered shorter-term mortgages, and you normally need a larger deposit. (See: How to Obtain a Mortgage if You Are an Older Borrower)
  • Your deposits: The more you can place down as a deposit, the lower the risk for the lender. Putting down a large deposit will give you more chances of being accepted, and you should also be able to be offered with a lower interest rate.
  • The value of the property: The size of the mortgage you need will have an effect on whether lenders think you can afford to keep up with the repayments.
  • The mortgage term: A shorter mortgage term implies higher monthly payments, so you may only be admitted for a larger mortgage if you pay it off over a longer period.
  • If you apply on your own or jointly: If you apply for a joint mortgage you may be able to borrow more since the income of the other person will be taken into consideration as well.

They also administer stress tests to examine whether you could still afford your mortgage if interest rates increased or if your circumstances changed, i.e. if you lost your job.

Work out your income

Sum up the following to determine your monthly income:

  • Your salary, including overtime and regular bonuses
  • Any income from your pension
  • Benefits and tax credits
  • Income from your investments, including shares, property and savings
  • Money you receive for child maintenance

Work out your outgoings

Make use of a calculator like Nationwide’s budget planner, to sum up the amount of money that you spend every month.

Alternatively, determine your essential living costs and other expenditures yourself:

Calculate your living costs

Credit card balancesOutstanding loans or overdrafts
Food and drinkInsurance you pay for
Student loan paymentsPension payments
Council taxToiletries and cleaning products
Mortgage payments or rentTV licence and subscriptions
Electricity, gas and waterInternet and phone
Petrol and car maintenanceTravel fares
Clothes and accessoriesMoney you save
ChildcareChild maintenance payments
School fees or costsPet costs

What else do you spend on?

Determine the total of how much you spend in an average month on:

  • Holidays and travel
  • Entertainment like music, the cinema, or sporting events
  • Your social life, including seeing friends and dining at  restaurants
  • Buying alcohol and cigarettes
  • Gym memberships and other exercise costs
  • Gifts for other people or luxury purchases

How to afford a mortgage

If your income is presently too low to secure a mortgage on the property you want, you could wait until your income becomes higher or consider the following:

  • Choose a cheaper property, as a lower purchase price means lower mortgage payments.
  • Choose a longer mortgage term, which decreases the amount that you repay every month. However, you will have to pay a higher amount overall.
  • Look for a cheaper mortgage since a lower interest rate can make the repayments more affordable.
  • Lessen your expenses and unnecessary costs. Consider making a budget and spend less.
  • Increase your deposit, which should help you receive a cheaper mortgage.

You should also take into consideration income protection insurance, which could satisfy your mortgage repayments if you were unfit to work due to an illness or accident.

Get the right mortgage

Avoid applying for too many mortgages if you get rejected since this can hurt your credit record and make it more difficult for you to get accepted.

Deciding on the right mortgage for your circumstances can help you get accepted and come with lower costs than unsuitable deals.

You can get mortgages designed for:

  • Buying your first home
  • Self-employed borrowers
  • Older borrowers
  • If you have a small deposit
  • If you have bad credit

Save on bills

You can also cut down on other expenses like the following:

  • Electricity bills
  • Council tax
  • Water bills
  • Gas bills

Should You Invest in a Unit Trust?

Unit trusts allow you to invest your money alongside other investors. It offers the chance of making big profits, but are they worth the risk? Here is a guide on how they can work for you as easily as they could work against you.

Pros and cons of investing in unit trusts

You should seek advice before making any decision on any stock market linked investment, but here are some unit trust related pros and cons to think about before taking that step:

ProsCons
Can invest in multiple securities with different risk factorsOffer price needs to exceed bid price before a profit can be made
Managed by a professional fund managerOverwhelming choice of unit trusts
Can invest in multiple securities with various risk factorsCharges can be expensive
Accepts smaller deposits compared to alternative investment productsCharges can be expensive

How do you monitor your unit trust?

You can observe your investment by contacting your financial advisor or fund manager.

Alternatively, you should be able to access the website of your chosen fund management company to check the performance of your investment at any time you want.

The performance information will reveal the value of the buy and sell price of an individual unit in the unit trust. If the selling price is higher than your original buy price, then you are earning a profit.

Can you use your ISA allowance with a unit trust?

Yes, you can invest in a unit trust by using your ISA allowance. This will make your investment tax-free.

This means that your investment amount is limited to your ISA allowance every tax year – currently £20,000.

Invest by communicating with the unit trust fund management company, an independent financial advisor, or a broker.

What are the risks of a unit trust?

As each unit trust invests in several companies tied to the stock market, you could end up losing cash as a result of a downward turn.

Your fund manager will monitor your unit trust’s performance to try and avoid any blips in the stock market, hence keeping your investment as profitable as possible.

Is a unit trust right for you?

To find out if a unit trust is the right type of investment for you, ask for guidance or advice from a financial adviser before making any decisions.

How do you close a unit trust?

You can talk to the fund manager directly and discuss the withdrawal of your investment.

You may have to pay an exit fee before you get your money back, Depending on the fund management company. This fee can cost you as much as 5% of your overall investment.

You will also lose money on your investment if the unit sale price is lower than when you made your investment. Make sure you arrange your withdrawal at a profitable time or risk losing money.

Ways to Borrow a Small Amount of Money

At times, borrowing a small amount can be more complicated or more expensive than availing for a larger loan. Here is a guide on some of the cheapest ways to borrow if you only need a small amount.

What are your options?

If you wish to borrow less than £1,000 you have some options:

  • Personal loan
  • Overdraft
  • Credit card
  • Friends or family

Each has an effect on your credit record in different ways,  and costs various amounts of money, and has numerous pros and cons.

Should you get a payday loan?

Payday loans or short-term loans are very costly and can hurt your credit record so it should only be considered as a last resort.

The options listed below are cheaper and are better for your credit record compared to a payday loan, so examine each one first.

Personal loan

ProsCons
Can improve your credit recordNeed strong credit to apply
Quick to apply forOnly for sums over £500
Regular repaymentsMore expensive rates

You could borrow between sums between the amounts of £500 and £35,000 with the use of a personal loan, so it is still worth contemplating even if you would only want to borrow a small amount.

How much will it cost? For a smaller loan, you may need to pay a higher rate since the best rates are for bigger loans that are usually between £7,500 and £15,000. Some lenders do not lend amounts that are less than £1,000 too, so you may have lesser choices.

How long will it take? Small loans are no faster than bigger loans. After applying for the loan, you should know whether your application has been approved within 24 hours. The money could then be credited to your account in one or two days.

Your credit record: To receive the best rates, you need a strong credit record. The loan will be included on your credit report and may restrict how much more you can borrow, but handles your loan well and it will improve your credit record.

You could apply for a guarantor loan rather than a standard personal loan if you have a poor credit record but you will require the help of a family member or a friend.

You could also study at bad credit loans. They are more costly than standard personal loans. However, they are more likely to consider your application if you have experienced credit issues in the past.

Credit card

ProsCons
Can improve your credit recordWithdrawing cash is very expensive
Quick to apply forNeed strong credit for best cards
Cheap option if you get a 0% cardCan take a while for a card to arrive

A credit card could be an easy and a quick way for you to borrow a small sum of money.

Most credit cards offer credit limits of several hundred pounds or more, and you can decide to borrow exactly the amount that you need.

How much will it cost? With a 0% purchase card, you can dodge paying any interest. Alternatively, you could transfer money into your account for a small fee using a 0% money transfer card. However, withdrawing cash from your card is very expensive.

How long will it take? If you already own a credit card, you can use it straight away. A 0% money transfer, on the other hand, usually takes around two to three days. If you need to apply for a new card, then it could take more than a week to arrive in the post.

Your credit record: You need to have a strong credit record to receive the best cards. All your credit cards appear on your credit report but if you make your payments on time, stay within your credit limit, and use the cards properly, they can help in improving your credit history.

Overdraft

ProsCons
Quick if you have existing accountNeed a bank account
FlexibleNeed a strong credit record
Some banks offer 0% ratesHigh fees if you go over your limit

With an overdraft that is approved, you can borrow from your bank account by using your debit card or withdrawing cash.

How much will it cost? For small amounts, some banks offer 0% overdrafts which can make this option one of the cheapest ways to borrow. Standard overdraft rates are around 15-20% APR. However, other fees may apply.

How long will it take? If you already own a bank account, an overdraft could be included the same working day. However, if you have a low income or bad credit, it can take longer.

Your credit record: Once approved, your overdraft will be added to your credit record which could decrease the amount that you can borrow. However, if you stay within your limit and manage your overdraft well, it will improve your credit record.

See: What is an overdraft?

Friends or family

ProsCons
No impact on your credit recordNo formal loan terms or rights
You can agree a loan termOwe money to friends or family
Can be cheapest optionNeed willing friends or family

Opting to borrow money from family or friends could be cheap and flexible. However, it is not always the best option.

How much will it cost? This will depend on what you agree with the person lending you the money. However, borrowing from family or friends could be your option that is cheapest.

How long will it take? If the person you are asking to borrow money from has the money ready, it could be the fastest option. Equally, if they would need to borrow or transfer or the money themselves, it may take longer.

Your credit record: Family and friends are less likely to bother about your credit record and borrowing from them will not display on your credit record so it will have no positive or negative effects on your credit history.

Will Switching Jobs Stop You From Getting a Mortgage?

Starting a new job could make getting a mortgage harder – even if you will earn more. Here is are the reasons and what you can do regarding this issue.

Why Do Switching Jobs Matter?

Switching to a new job will have an effect on your chances of being accepted for a mortgage since most lenders only offer you a mortgage if you have been in your job for a while.

Various lenders may accept you if you have worked there for three months or less. However, some mortgages are only available if you have been in your job for more than three years.

It depends on the acceptance criteria of the lender- their rules on who they are pleased to offer a mortgage to – which includes your age, employment status, credit record, and income.

Why Would They Turn You Down?

Lenders think that it is riskier to give you a mortgage after you start a new job. You could become unable to sustain your mortgage payments if lose your job because of:

  • Redundancy: When your employer needs to make cuts, the newest employees are normally the first to go.
  • A probation period: Your company could end your contract without notice during this period (unless your role becomes permanent).

If You Currently Earn More

Even though a new job can lessen your chances of getting a mortgage, a higher salary can reduce the impact since it increases what lenders think you can afford to borrow.

You will need to prove your new salary, so ask your employer to verify it in writing.

If You Currently Earn Less

Transferring to a new job with lower pay means that the amount you can afford towards mortgage payments will decrease

This means that you can borrow less, so if you are currently looking for a property, you may need to lessen the price you can pay.

If you have already started with your application, allow your lender to know your new salary and ensure that they can still offer you a mortgage.

If Your Income Is Dependent On Commission Or Bonuses

If your new job gives a lower basic salary but includes commission, bonus payments, or overtime, try to prove to the lenders how much you could earn.

Your payslips can prove this if you have been in a job a few months. If not, a written confirmation of guaranteed bonuses or what commission you can receive may help.

If You Go Self-Employed

If you are working for yourself, you could still obtain a mortgage. However, you will need to be able to prove your income.

Lenders normally need to see your statements and account for at least the past year, and sometimes three years or more.

This implies that you may not be able to purchase a house immediately if you have just gone self-employed.

Should You Delay Buying A House Or Moving Jobs?

You could wait until you have been in your new job a while before you begin house hunting. Your job will seem more secure, improving your opportunities for a mortgage.

Waiting until your probation period is over and you have been in the role for more than six months is enough for most lenders.

If you want to buy a house sooner, decide if changing career can wait until after you transfer.

What If Neither Can Wait?

There’s still a possibility that you could be able to get a mortgage, but you will need to look for a lender that is not put off by your career change.

Contact a mortgage broker since they usually have access to exclusive deals and know which lenders are most likely to accept you.

You could also increase your chances if you can put a large deposit towards the house.

If You Already Have A Mortgage

If you desire to switch to a new mortgage soon, getting a new job can make it more difficult to get a new deal.

It may be easier to change before you transfer jobs if you can do this without any fees.

If your new job has a lower salary, affording your monthly payments can be harder.

How to Obtain a Mortgage if You Are an Older Borrower

 

Getting a mortgage can be harder when you get closer to retirement. Here is a guide on how to look for one whether you want to move to another house or remortgage your current home.

What is the age limit for obtaining a mortgage?

There is no maximum age for applying for a mortgage. However, some lenders have their own age limits:

  • Typically, a maximum age of 65 to 80, when you take out the mortgage.
  • A maximum age of 70 to 85, when the mortgage term ends.

This suggests that even if you are below the maximum age for a mortgage, its term could be restricted by how old you are.

If you are 60, for example, and you want a mortgage that must be fully paid before the time that you reach 70, its term could be no longer than ten years.

You will receive a greater chance of being accepted if you possess a strong credit history and if your income is large enough to easily satisfy the mortgage repayments.

Why would you want a new mortgage?

  • You avail a remortgage to get a better deal on your present home, especially if a fixed or tracker rate has expired
  • To move to a house, for example, downsizing to a smaller property

Why it can be more difficult to obtain a mortgage when you are older

If you retire before you are done paying for the mortgage, you will not have a regular salary anymore. Your income will normally decrease, which means that lenders will be uncertain if you will still be able to afford the mortgage repayments.

This suggests that granting you a mortgage gets riskier as you get older. The Mortgage Market Review (MMR) rules must be followed by lenders, which means that they have to make sure that you can keep up with repayments over the full term of the mortgage.

 After you retire, can you still get a mortgage?

Yes, some lenders will allow you to:

  • Take out a mortgage that will be unpaid until after you have retired
  • Take out a mortgage after you have retired

You will be required to prove that the income from your pension would be enough to satisfy the repayments on the mortgage. It is normally easier to do this if you are already retired because you can reveal how much you receive each month.

If you are not retired yet, you are required to request your pension provider to provide confirmation of your:

  • Current pension pot value
  • Expected retirement date
  • Expected retirement income

You could also prove that you will receive an income from other investments like property or shares.

What mortgages can you avail?

Mortgages that take in older borrowers come with fixed interest rates and several offer rates that follow the Bank of England base rate.

There are also some cashback, offset, discount and stepped mortgages that are available too.

How to get a mortgage

  • Talk to a mortgage broker because some mortgages for older borrowers are only available through them and they will examine your finances to find you a suitable deal
  • Use comparisons to look for mortgages that may accept you if you are over 50 or over 60
  • Look for specialist mortgages that are offered by lenders aimed at older borrowers, which you can usually find through mortgage brokers
  • Check the maximum age that you can be when you apply
  • Choose a mortgage that is best for your circumstances

Should you make use of equity release?

To withdraw a portion of the share of your home that you possess as a monthly income or as a lump sum, you could use an equity release mortgage. You could then make use of this to:

  • Pay for a big purchase or an unexpected cost
  • Pay off your mortgage
  • Fund your retirement

The amount that is borrowed will be repaid when the house is sold, ordinarily, after the borrower has transferred into a care home or has passed away.

How Should You Make Payments for Your Rental Deposit?

Deposits, letting agent fees, and rent are increasing in price. Here is a guide on how to pay your deposit and whether you should consider using a credit card or borrowing the money.

Your mode of payment

Your method of payment is up to your letting agent or your landlord, but they may let you pay by:

Private landlords sometimes accept cash. If you pay with cash, secure a receipt in case you need proof of the amount of your payment in the future.

If you already have the money saved up, using this is normally your cheapest option. If you can not yet afford a deposit, you need to borrow the money or save up.

How to quickly save up a deposit

You can save for a deposit by setting aside as much as you can afford every month into a savings account. Increase the amount that you can save by:

  • Decreasing your cost of living
  • Sticking to a budget

Could you borrow the money for the rent instead?

You could borrow money if you do not have enough saved for a deposit. You can pay it back after several months.

However, the interest you pay can make it much more costly than using the money that you have saved. Paying back a loan can also make it more difficult for you to afford your rent.

Some landlords normally prefer tenants who have saved up enough cash for a deposit. This is because it determines that you are financially reliable.

Some might not allow you to rent their property if you are in debt because you could find it hard to afford your rent as well as the repayments for your loan.

Can you pay a deposit using a credit card?

Yes, some leasing agents allow you to pay your deposit using a credit card. However, they often charge you a fee of 2% of the deposit amount or more.

Private landlords usually do not accept credit card payments. Also, some letting agents do not accept them either.

This is because landlords can not usually accept credit card payments, and they cost more for letting agents process the payments.

If you decide to pay by using your credit card, you could pick one that offers interest-free purchases. This could allow you to pay back the deposit amount over several months without interest charges.

Can you avail a loan for your rental deposit?

There are a lot of ways to borrow money, including:

  1. An interest-free money transfer credit card
  2. An interest-free overdraft
  3. A personal loan

Be sure that you can be able to pay the repayments on top of your rent and the rest of your living expenses before you apply for any kind of loan.

Can you borrow from family or friends?

If your family, parents, or friends can loan you the money for your deposit, this could be a much cheaper option, especially if they do not charge interest.

Ensure that you get your deposit back

When you move out, you should get your deposit back if you:

  1. Make on-time payments for your rent
  2. Not damage anything while you live in the place
  3. Make the property tidy and clean when you move out
  4. Follow the terms of your tenancy agreement

Check if your money will be safe

Estate agents and landlords cannot keep your deposit in their own bank account. They are required to pay it into a Tenancy Deposit Plan (TDP).

This hinders them from spending the money. It also gives you the extra protection that could assist you to get your money back when you move out.

 

What You Should Know Regarding a Graduate Loan

Graduate loans work in similarly the same way as unsecured personal loans. However, banks manage to grant better rates for graduates. You will usually have to possess a current account with the same bank or building a society to be qualified for a graduate loan.

After agreeing to make regular repayments (usually by direct debit), a lump sum will be lent to you. Graduate loans are available for up to a maximum of £25K. The said loan is repayable over a predetermined period, usually between a period of six months to 10 years

Interest will be charged by the lender on the borrowed amount. The interest tends to be fixed at the start of the loan, which implies that repayments will remain the same throughout the term; some loans, including flexible loans, however, can be variable.

This interest charge is registered as an APR (Annual Percentage Rate). The law requires all lenders to quote the APR. The advertised typical APR quoted is needed to be proposed to at least 50% of borrowers.

The APR usually depends on the size, and sometimes the term, of the graduate loan. This implies that the best rate for one graduate loan amount may not be the best rate on all loans.

The same rate for all their borrowers may not be offered by some lenders. That is why you need to check the best rate for the amount and term you are aiming for.

Things to consider regarding graduate loans:

1. Representative APR

You may not always receive the advertised representative APR on a graduate loan. The rate you are offered can depend on your credit rating. Lenders will use a scoring system to check how credit-worthy an applicant is.

2. Graduate loan early settlement penalties

You can save hundreds of pounds in interest if you pay off your graduate loan early. However, it is crucial to remember penalties are applied by a number of lender to those who opt to close their graduate loans prior to the end of the term.

3. Graduate loan deferment periods and payment breaks

Many lenders will allow a grace period between the time that you have received your loan and the time that the first payment is needed to be made. Interest is still charged over this period even though this will give you a break from payments thus, increasing the total interest payable. Some lenders may also offer breaks during the term of the loan. However, interest is charged on the outstanding balance. This signifies that a higher loan amount is left unpaid for a longer period. Charges may also be incurred during these breaks.

4. Graduate loans & same-day funds

Same-day funds facilities are offered by some lenders. Same-day funds facility means that you receive your money on the same day that you complete the application. Usually, there will be a fee for this type of service, which can be as high as £50. So you have to consider this carefully.

5. Direct debits

A direct debit is required by most lenders so you can pay the monthly instalments on your graduate loan. You need to make sure that your bank account will be able to accept these and the money is available for making payments.

6. Payment protection insurance for graduate loans

This is an optional insurance that will satisfy your repayments should you not be able to work under certain circumstances. Which includes:

  • Accident
  • Death
  • Unemployment
  • Sickness

You should know that it is of utmost importance to examine the small print to make sure that the cover that is provided is suitable to your needs.