Loans

Loans are more suitable for large purchases where you have no savings to use, and the cost of the item exceeds your income. The amount of the loan will have to be repaid to the lender over an agreed period and at the interest rate fixed by the lender. However, loans that require a home to be put up as security should be avoided.

 

1. A loan should be taken for the minimum period possible.

 

2. A budget plan should be prepared before taking out a loan to clarify the payments you can realistically afford.

 

3. The terms of the loan agreement should be read carefully to look for extra charges such as penalty payments for early repayment of the loan.

 

Interest on loans can be fixed whereby the interest is worked out at the beginning of the loan and included in the monthly payments. Alternatively, interest can be "revolving", whereby the interest is worked out on the amount you still owe each month and regularly charged to your account. This is the most expensive type of loan as this means that the debt grows every month.

 

Avoid door collection loan companies as they usually charge the highest interest rates. More competitive rates can be obtained from major banks, building societies and finance companies.

 

Also look out for loan insurance (payment protection insurance PPI) as this is often added to the loan without proper discussion with you and interest will be charged on the insurance premium. High-risk borrowers will usually be forced to take out loan insurance as part of the lender's agreement to provide credit, but low-risk lenders can refuse loan insurance if the premiums appear high and are not competitive. A stand-alone insurance policy for critical risk cover may be much cheaper.

 

Loan insurance may cover either death or both death and redundancy or total cover for death, redundancy and sickness. Decide which is more suitable for your personal circumstances.

 

Always ask the lender to provide the total amount they intend to charge for the loan. This should include all administrative costs, broker's fees, loan interest and payment protection insurance.