Personal Loans – think before you sign

In the old days, if you wanted a loan, you’d go and see your Bank Manager. With the advent of technology, things have changed a lot, and many people are more likely to ring one of the loan companies advertising cheap loan rates on the TV, or apply online. However, signing up for a loan without going through the finer details face to face poses a number of risks, as we discuss in this article. The Department of Trade and Industry recently made some changes to the rules governing loans. Now, loan companies must spell out the facts of the loan agreement, and the costs involved, to the borrower before they sign - so they can compare the costs with other deals. The main difference with the new rules is that loan companies must clearly state the main facts of the loan agreement, which we have listed here below: •The amount to be borrowed and the amount to be repaid.•How much the instalments will cost, and how often they will need to be paid. •The Annual Percentage Rate of interest (APR).•The consequences of missing payments or paying late.•The consequences of moving the loan, or paying off the loan before the agreed time.To get the cheapest deals on the Internet, all you have to do is find a comparison website and see which deal comes out on top. But there are hidden pitfalls. If that low rate at the top of the table is followed by the words APR Typical, then it is quite possible that you won’t actually be offered that rate when you come to apply. The rate that the loan company offers you will be dependent on your credit record. The APR Typical rate is only available for the lucky 66 of people that apply. It doesn’t mention the fact that anyone with a slightly blemished credit history will not be able to get that low rate. The other 33 have to settle for a higher rate than they expected.A quick search on the Internet brought around 30 loans with interest rates below 7 to light. But what they don’t mention is that only those lucky people who have never missed a payment will have access to those rates. As the general public’s dependency on credit increases, naturally the amount of people with perfect credit records is starting to wane. The 33 of people that get given a higher rate often get given a far higher rate! Another thing that the loan companies don’t make a habit of telling you, is that every time you apply for a loan, whether you end up taking the loan out or not, a mark is left on your credit record. These are called ‘footprints’. The big credit reference agencies keep this footprint on the records, and each time a footprint is left, your credit rating goes down. If you apply for a loan and get knocked back, then apply for another loan and the same happens again, you are affecting your future ability to get credit, without even necessarily knowing why you were turned down. Eventually, you may find yourself unable to get a loan from any mainstream lender.The situation is self-perpetuating – to find out the rate they’re going to offer you (assuming it’s not going to be the Typical APR) you need to apply; and every time you apply your credit rating takes a hit. The only way to avoid this situation is to contact a specialist loan broker. They’ll be able to work out which lenders will offer you the best rates taking your credit history into account, thereby bypassing the danger of making multiple applications. Another thing to watch out for: Payment Protection Insurance (PPI). PPI is designed to protect your monthly loan repayments if you’re unable to attend work due to accident, sickness or unemployment. When you take out a loan, your lender will no doubt try to get you to take out a PPI policy with them. However, many omit to mention all the facts about the insurance, namely the ‘exclusions’. Exclusions are circumstances that will mean you are not eligible to make a claim. These exclusions can be quite lengthy with PPI, so make sure that before you sign up, you are eligible to make a claim – up to 50 of people end up getting their claim rejected for this exact reason. If your situation makes you applicable for PPI then take care with whom you buy it from. The following figures are based on a £3,000* loan taken over three years, amazing what the differences are! Smile Loan£566.53Ryanair Personal Loan£486.72Virgin Personal Loan£486.72Moneyback Bank Personal Loan£417.96Nationwide Personal Loan£325.44Northern Rock Personal Loan£228.24*These figures were calculated by using the cost of the loan with PPI, and the cost of the loan without PPI, and finding the difference. The figures originate from Moneysupermarket. As of Jan 2006, the figures quoted in this article are correct.Unbelievably, the most expensive on the above list is almost 150 more expensive than the cheapest – and they’re all big name, mainstream lenders that you would trust to give you a good deal. You could be forgiven for thinking that the Northern Rock quote, the cheapest on this list, must be the best deal available. We decided to check, just to be sure.We compared the quote to British Insurance Ltd, a company that has been highly recommended in the financial newspapers of late. We asked them to provide a PPI quote assuming a monthly loan repayment of £92 (the typical monthly loan repayment quoted by the loan companies above on a £3,000 loan over three years). Their quote came out at just £3.63 per month. That’s £130.38 over three years, £97.86 less than what Northern Rock quoted. So Northern Rock is also exposed as yet another rip off! The advice is: buy your PPI independently, not from your loan provider. Search on the term ‘Payment Protection Insurance’ on the Internet and you’ll have a cheaper quote and full cover in moments – but be sure to read the exclusions first and check that you are eligible for cover.

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