A Guide on Unsecured Car Loans

An unsecured car loan is a kind of personal loan that is offered solely for the acquisition of a vehicle. The loan will normally come with additional benefits including discounted car parts, breakdown cover, vehicle inspections, etc.

Unsecured personal loans – and therefore car loans – are customarily covered by the terms of the Consumer Credit Act

An unsecured car loan works similarly as a traditional personal loan: a lump sum is granted in return for you agreeing to perform regular repayments, usually via Direct Debit. It is repayable over a specified period of time, normally between six months and ten years (even though loans for car finance tend to be over a shorter term, usually three years). Security will normally be required for loans of a large amount.

Lenders charge interest on the amount availed. The interest rate is normally fixed at the inception of the loan, which signifies that the repayments remain the same throughout the term.

The interest charge is recorded as an APR (Annual Percentage Rate). Any institution that lends money is obliged by law to quote the APR and to suggest this advertised rate to 51 percent of borrowers. The APR is usually dependent on the amount of the loan and sometimes the term as well, even though some lenders do offer the same rate to all their borrowers.

It is important to check for the best rate that is dependent on the amount of loan and term that you are after.

Read our guides on personal loans for more in-depth summaries of the things that you need to think about when taking out an unsecured car loan, including:

  • Representative APR – The advertised representative APR may not always be the one that you receive, the rate that you are given depends on your credit rating, a scoring system that is used by most lenders to determine how creditworthy an applicant is.
  • Personal loan early settlement penalties – Paying for your loan earlier than when it will fall due can save you a lot of money in interest. However, some lenders charge penalties to customers that are wishing to repay the entire amount before the end of the term. If you are refinancing, you should take into consideration the said penalty.
  • Personal loan deferment periods and payment breaks – A break between when you receive your loan proceeds and when the first payment falls due, beyond the standard month, is allowed by many lenders. While this gives you a break from your dues, interest is charged over this period which actually raises the total interest payable. Payment breaks during the loan term also alo be offered by the lender, however, interest is charged on the amount that is not paid. This indicates that a larger loan amount is left unpaid for a longer period. These breaks may incur charges.
  • Direct Debits – To pay the monthly instalments, most lenders require a Direct Debit. Verify if your bank account can accommodate these and make sure that the money is available for payments. Penalty charges for missed payments can be huge.
  • Payment protection insurance for unsecured loans – This is an insurance that is optional. It will cover your repayments should you not be able to work under particular circumstances and can include:
    1.  Accident
    2. Sickness
    3. Unemployment
    4. Death

It is important to read the small print to make sure that the cover that is provided is suitable for your needs.

Personal Loans: Key Factors to Consider

As with any financial product, there are basics that you must consider to make sure that you are getting the right unsecured personal loan.

Our step-by-step guide will assist you in considering all the options that are open to you.

Secured or unsecured?

  • Personal loans or also known as unsecured loans usually allow you to borrow a maximum of £25,000. Some will now let you borrow more.
  • Unsecured personal loans do not have as much risk to the borrower as a second charge mortgage (or secured loan). However, if you default on your repayments, it will have an effect on your credit rating, and you will find it difficult, and definitely expensive, to get credit in the future.
  • If you are looking to borrow over £25,000, most lenders will require security such as property, which means that you will have to go for a secured loan which is also known as a second charge mortgage. These will need a property as security, so if you do not have a property or if your property has no equity, you are restricted to an unsecured loan only. Secured loans are only available to those with an existing mortgage.
  • Beware! If you go default on your secured loan repayments, the lender can file for a repossession of your home, so banks will get their money back one way or the other.

Are you getting the best loan rate?

  • Interest rates for personal loans are priced in advertising and on your credit agreement as an Annual Percentage Rate (APR). All lenders should determine the APR based on the same calculation so you can be able to compare the cost of the loan.
  • Lenders will have various APRs for different tiers of borrowing. However, their lowest rates will tend to be for mid-range or higher borrowing amounts.
  • Adverts for credit, which includes personal loans, have to value a Representative APR, which should apply to at least 51 percent of people who apply as a result of the advert. The actual APR that you are offered will depend on your personal circumstances. The more ‘creditworthy’ you are, the lower the rate you will be offered.

Monthly loan repayments

  • Obviously, you will need to ensure that you can satisfy the monthly repayments. Unsecured personal loans are on a fixed rate basis, so you will know what your repayments will be throughout the loan term. Secured loans, on the other hand, tend to be on a variable interest rate, so make sure that you can cope with any changes in the interest rate on both your first and second charge mortgages.

Do I need insurance to cover my loan repayments?

  • Loan payment protection can be an important insurance to have as it can secure your loan repayments if you are unemployed or sick. However, do not buy the PPI that the lender offers you. Compare payment protection products or go to an independent broker who can give you a better product which is best for your needs. Beware! Always understand the small print of the policy before you take out the insurance.

Upfront fees

There may be upfront fees that you will be required pay. Determine whether these are worth paying, because if they result in a lower repayment, they may signify good value. Remember to factor in any interest that you would have earned on the money if it was in your bank account instead.

The Best Ways to Pay for Your Wedding

Your wedding will be a marvellous day, but an expensive one also. Picking the right way to pay for your big day could help you come in on budget.

Use your savings

Using your savings could be the option that is cheapest since you would not be charged with interest for borrowing.

Before you choose to empty your account, ask yourself these questions:

  • Are you saving for a house deposit? If you are saving for a new home, consider keeping your money since you cannot use credit cards or avail a loan to pay for a deposit.
  • What savings rate are you receiving? If you can borrow money interest-free, you might be better off leaving your savings to earn some interest.

If you are planning your wedding day years in advance, you might have the time to establish a budget and save enough to pay for it without borrowing a cent.

If you do not have any money saved up, there are other ways that you can pay for your wedding.

Get a new credit card

A credit card can be an affordable method to borrow the money that you need to pay for your wedding.

Spread the cost and pay no interest

0% purchase credit cards allow you to spend without paying interest for a fixed number of months.

For example, a card with 28 months interest-free means that you will not be charged any interest on things you buy for that period as long as you satisfy the terms of the card.

This means that you can spread the cost over the interest-free free term, and if you repay off the balance before the term is over, you can borrow interest-free.

However, you may only be accepted for this kind of card if you possess a good credit record, and the credit limit that you are offered may not cover all your wedding costs.

Earn rewards

If you have managed to save the money that you need to spend for your wedding, buying everything using a rewards credit card could be a great way to receive some additional perks.

As long as you pay for the balance in full every month with your savings, you could earn air miles, cashback, or other rewards without paying any interest.

However, if you are not able to pay off the balance, the interest that you receive charged could cost you higher than the perks that you receive in return.

Credit card spending is protected

One benefit of spending on your credit card is that it comes with protection under Section 75 of the Consumer Credit Act.

Any purchase that you make between £100 and £30,000 is covered, and you could refund your money from the card provider if something goes wrong.

Even if you only pay for the deposit with the use of your credit card, the total amount paid will be covered under Section 75.

For example, if you paid a deposit of £100 using your credit card for your venue, and you pay off the balance of £2,500 using your savings, the total amount of £2,600 would be covered.

Get a personal loan

Getting a personal loan can be an expensive way to pay for your wedding. However, it could satisfy all your costs and allow you to pay it back in monthly instalments.

You could borrow up to £25,000 over one to seven years using a personal loan, with some available at interest rates below 3 percent.

The annual percentage rate (APR) is the interest that you need to pay on the total value of your loan. Which means that the lower your APR, the less interest you will pay on what you borrow.

You should only avail of a loan if you do not have enough savings to satisfy the costs, or you cannot get a 0% purchase credit card with a large enough balance.

Ask help from family and friends

If you are lucky to have friends and family that are willing to assist with the price of your wedding, it can ease the strain.

Normally, the family of the bride takes charge of the bill. However, nowadays it is usually down to you to cover most of the costs. (See also: Family or Friends, Who Should You Borrow From? )

Protect what you spend

Before you spend on anything, consider getting a wedding insurance policy.

This could cover you if something goes wrong and you are forced to cancel, like if your venue goes out of business or if one of your wedding party falls ill.

See: Do You Need Wedding Insurance?