Personal loans. What do you need to know?

I was talking to some friends last week. They graduated a few years ago. They have common sense and are very logical. This is the case for most of their friends too, yet lots of them feel very confused and ignorant about how to manage their finances, how things like the fiscal year affects them, why they should save and so on.

This is something they were not taught in secondary/high school and unless you tell me otherwise, the syllabus has not changed. Thus many young adults go to Uni and have no idea how to manage their money, limit how much debt they accumulate & as a result, get very stressed. So I’m going to try and answer some questions in separate posts.

Personal loans

Personal loans are for fixed amounts and are more suitable for borrowing larger sums over a longer term. If you’re considering borrowing, be sure you can afford the repayments.

With a personal loan you borrow an agreed sum and pay it back with interest over a certain length of time (usually one to five years). Interest rates can be fixed or variable. You normally have to stick to a payment schedule. Personal loans can be handy for covering large expenses like buying a car or equipment.

An ‘unsecured’ loan means the lender relies on your promise to pay it back. They’re taking a bigger risk than with a ‘secured’ loan, where they can take whatever you’ve secured the loan against (like property) if you don’t repay it. So interest rates for unsecured loans tend to be higher.
What does APR mean?

APR stands for annual percentage rate. It shows you the actual cost of the loan, as a yearly interest rate. It includes charges and fees as well as interest to help you compare loans on equal terms.

Pros and cons of personal loans

Pros:

* you can generally borrow larger amounts than with an overdraft
* you’re free to shop around – you don’t need a bank account
* interest rates and charges are normally lower than for an overdraft
* you know exactly when the loan will be paid off

Cons:

* loans are less flexible than overdrafts
* there may be penalties for paying a loan off early
* you can’t normally miss a repayment

Points to watch out for

* don’t be persuaded to borrow more than you need or can afford
* if the interest rate’s variable, make sure you budget for possible increases
* some lenders press you to buy insurance to cover the repayments if you get ill or lose your job

Shopping around for loans

There’s a wide choice of loans available, so shop around for the best deal. Compare interest rates, APR, terms (like charges and penalties for paying the loan off early) and how long you can borrow for. You can use the FSA’s online calculator to work out typical monthly repayments.

* Calculate typical monthly loan repayments online at the FSA website

* Compare current loan rates online

Can you afford to borrow?

Whether borrowing through an overdraft or a loan, be sure you can afford the repayments. If you can’t, your debts can quickly spiral out of control. You’ll also find it harder to borrow in the future due to a poor ‘credit record’.

* Take the FSA online debt test before you borrow

* Use the FSA ‘Moneymadeclear’ budget calculator

More useful links

* Moneymadeclear – impartial information from the FSA

* Managing debt

* Main ways to save or invest your money

* Tax on bank and building society accounts

* Getting tax-free interest on savings and claiming tax back