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The Annual Equivalent
Rate indicates what the interest would be if interest was paid and
compounded each year instead of being paid monthly. This is useful when
comparing savings accounts and investment accounts, as it shows the
return you can expect to see over time, as long as you do not take the
interest out of the account.
It is important that you
do not get Annual Equivalent Rates mixed up with Annual Percentage Rates
as they mean very different things. This is a common mistake people make
so make sure you read the small print of any product you are thinking of
taking.
This type of interest
rate is based on your personal circumstances and credit rating, and can
vary according to how much of a risk you are seen as by lenders. Whilst
lenders will quote a typical APR to show what the majority of borrowers
will get, you will not know what rate will be given to you until you
actually apply.
You should be aware that
applying for a loan to see what interest rate you get that can be
dangerous as it leaves what is known as a ‘footprint’ on your credit
record and other lenders may take this into account when deciding
whether to lend you money or not.
The Annual Percentage
Rate (APR) charged by the lender is also known as the interest rate.
This is the amount charged, per year, on the money you owe. The APR on
loans can range from under 6% to over 30% depending on the amount you
are borrowing and your personal circumstances.
The APR should take into
account any other charges the borrower has to pay, and it can be fixed
or variable, with the latter meaning that your lender can change the
interest rate at any time.
APR’s are often
described as Typical APR’s
This is the expression
that is used when you are behind with your repayments.
It is important that you
keep up-to-date with the monthly repayments on your mortgage. When
mortgage payments have not been paid on time and/or are not made at the
correct amount, borrowers are said to be in arrears.
Borrowers with a history
of arrears will find it harder to borrow money in the future. Although
there are a number of lenders who will consider lending to individuals
with poor credit history, the interest rate will be higher than the
Typical APR because of the additional risk to the lender
If you have a poor credit
history, some of the cheaper lenders may reject your application for a
loan because they will only lend to people who have a good credit
record. However they all apply different rules and many will be more
sympathetic if you have had only one instance of bad credit, and have
since cleared the debt in question.
If you do have bad credit
it may be better to apply to a lender who specializes in this area,
although it will probably be more expensive. Bad credit loans are also
known as adverse credit loans.
Balloon payments allow
you to reduce your monthly payments by deferring part of the payment
until the end of the loan agreement. These are most commonly applied to
loans that are linked to buying a car. At the end of the period you can
either carry on paying monthly installments until the balloon amount is
cleared, or pay off the amount in full.
Often, where the finance
is provided by a car dealer, or a lender that specializes in lending
money for cars, you can hand the vehicle back as the balloon payment is
linked to the anticipated value of your vehicle based on the mileage you
told them you would do.
Borrowing is an
expression used to describe your debts, which can take a variety of
forms.
Most people think of a
loan if you need to borrow money, but a loan might not be the best
solution. A credit card might be a better idea for borrowing small
amounts, but interest rates can be higher and it's harder to control
your spending with a credit card, unless you are really disciplined.
Always make sure you understand what your options are for borrowing
money before applying for any loan product and don’t take the advice
of your bank just because it feels like hard work exploring other
options – invariably this will cost you more in the long run.
A CCJ is given when you
default on a debt, and the person you owe money to applies to the court
to get the money back. If you owe a lot of money and receive a CCJ, try
to pay it off within a month (this way, it won't be filed by credit
reference agencies). If you can't, the CCJ will affect your ability to
get a loan. The CCJ will remain on your file for at least six years. If
you are in danger of defaulting it is always better to talk to the
company you owe money to and agree a sensible plan to pay them back.
This way receiving a CCJ can be avoided.
All loan companies will
check your credit rating with a credit reference agency to see whether
you're a particular risk to them. Your credit rating (or credit score)
takes into account your credit history including how many late payments
you've made recently on your credit cards, loans, utility bills etc; how
many credit cards you've been turned down for; the area you live in and
the value of your house; how many County Court Judgements are recorded
against you.
If you have been making
late payments or applying for lots of cards you might have a bad credit
rating. Unfortunately, companies that provide low interest loans tend to
have a stricter credit scoring system and might not accept anything but
perfect credit. For a small fee you can access your credit history by
contacting one of the credit reference agencies (Experian and Equifax
are the two biggest).
These days having a less
than perfect credit record or an irregular income should not stop you
from taking out a mortgage or getting access to other borrowing. Recent
research reveals that about a quarter of the population would be refused
credit, showing that it is not a problem confined to the minority.
If you have had credit
problems in the past don't immediately rule out the high street lenders.
They say they take each case individually and would consider someone
with a County Court Judgment (CCJ) for non-payment of debt, if it was
for a small amount and had been cleared some time ago. But if you are
refused credit, lenders don't have to tell you why.
Both a CCJ and a
bankruptcy order are held on a person's credit record for six years.
CCJ's can be withdrawn from your file if they are cleared within one
month. It is worth knowing that you could be unaware that you have a CCJ
on your credit record, perhaps caused by a bill being unpaid if it was
sent to an old address.
When you apply for
credit, lenders check your credit record, called credit scoring, with
specialist credit reference agencies that collect information from the
courts, lenders and the electoral roll.
If you feel you there has
been an error made in your credit scoring you can obtain your credit
file, ask for an investigation and, if proved correct, have your record
altered.
Beware of so-called
credit repair companies, especially if they try to offer you loans at
high rates of interest. If that happens steer well clear.
This is the agency that
deals with checking your credit rating. It is an independent body used
by mortgage companies, loan companies and credit card suppliers. It
compiles data from all lenders to build up an accurate view of your
credit history. For a small fee you can see your credit history by
contacting one of the agencies. If you are having problems getting
credit it is important you understand what your credit record looks
like. Many people are afraid to do so, but you are simply putting off
the inevitable by not dealing with your debt issues now.
You can order your credit
history record online from Experian and Equifax:
This involves taking out
one loan to pay off all your existing debts. Quite often this will lead
to a lower monthly payment and help you manage your debt more easily,
although if the loan is taken out over a longer period you may end up
paying more in total. Also, if you do consolidate your debt in this way,
and in particular pay off credit cards, it is important that you do not
simply start using the credit cards again as before long you would not
only have your consolidation loan, but also debts on your credit cards.
If you choose to speak to
a loan broker they will inevitably try to get you to consolidate all
your debts into one loan. In some circumstances this may be the best
thing for you to do, but think carefully before doing so, and make
absolutely sure it is the best option for you.
Most loan and mortgage
companies will insist on you making repayments via direct debits, which
automatically come out of your bank account on the same date each month.
You can also set up Direct Debits to make payments on your credit cards
based on either a set amount, or the minimum amount due each month.
Direct Debts differ from
Standing Orders because the organisation to which you pay the direct
debit can change the amount, where as with a standing order only you can
change the amount.
You can however cancel a
direct debit at any time although if you do this when you still owe
money you may incur a bad debt if you do not clear what you owe.
This tends to be an
option made available with so-called flexible mortgages or loans. The
lender will agree how much you can borrow but leave it to you to 'draw'
funds out at any time during the term.
As a borrower it means
you have access to borrowings in the future without having to resort to
a re-mortgage or additional loan, as long as you do not borrow more than
the amount you originally agreed with the lender.
For many people this is a
great facility as it provides comfort that further funds are available,
however it is important that you have the right amount of discipline and
do not waste the money available to you.
This is the fee charged
by many lenders if you decide to pay back your loan or mortgage early.
For loans it often equates to up to 2 months' interest, but not all
lenders make the charge. For mortgages it usually equates to a fixed
percentage of the loan depending how long you have had the mortgage.
These charges apply particularly for mortgages where you have been given
a discount of some sort for a fixed period at the start of the term.
Early redemption charges
for loans are increasingly coming under fire from consumer groups
because many consider it unfair that you have to pay an additional
charge should you clear your debts early. If you agree with this you
should try and find a loan that doesn’t charge early redemption fees.
As the name suggests,
with a fixed APR your interest rate is fixed at the same level for the
life of your loan. Conversely, with a variable APR your rate will change
as the market changes and the lender adjusts its charges.
The main advantage of
having a personal loan with a fixed rate of interest is that you will
know just how much you will have to repay each month and that this
amount is fixed for the life of the loan, which makes budgeting much
easier. Most personal loans on the market now have fixed rates, although
there are many mortgages available that have variable rates.
A flexible loan is a loan
with a draw down facility. You agree a credit limit against which you
may borrow and, thereafter, you may have as much or as little of the
money as you want whenever you want it. You will only be charged
interest on your outstanding balance each month.
Unlike a standard
personal loan in which your monthly payments are fixed, subject to a set
minimum amount payable by direct debit you may decide how much you repay
each month.
A flexible loan will
allow you to repay your loan early without incurring any additional
charges other than the outstanding balance that is due, and sometimes
offer further flexibility in that you may make lump sum reductions to
the balance of the loan without being charged for doing so.
A flexible loan can be
suitable for those whose income varies, such as the self employed,
allowing you to pay extra off the balance as and when you please. The
benefit of this is that the loan will be repaid earlier, thus saving you
a substantial amount of interest.
Also known as
'conditional sale', a Hire Purchase (HP) agreement is a loan linked to a
specific purchase, such as a car, a furniture suite, etc. It is
effectively a means of obtaining the use of something before payment is
completed.
An HP contract involves a
deposit, or 'down payment', thereafter you 'hire' the item you are
buying for a fixed period, during which time you pay for it in monthly installments,
plus interest.
As the purchaser you will
not own whatever you are buying on HP until you complete the payments
and if you fail to do so the company that has arranged the HP agreement
will be within its rights to repossess the asset in question.
This type of loan is
secured against the value of the property you own and are also known as
secured loans. If you are a homeowner you can still take out an
unsecured loan, but secured loans are necessary if you wish to apply for
a large amount (more than £15,000) or have a poor credit history.
You can take out a
homeowner loan if you already have a mortgage as long as there is some
equity in your house (although some lenders will now lend up to 125% of
the value of your house).
If you have already have
a mortgage, homeowner loans are often described as ‘second charges’
or ‘second mortgages’. As with a mortgage your house is at risk if
you do not keep up repayments on a loan secured on it.
It sounds too good to be
true but you can get interest free loans, which are mostly linked to the
purchase of something like a TV or sofa. You will be given a set period,
months or years, in which to repay the debt. Providing you do so, the
financing will not cost you anything extra and you will have been able
to spread the cost of the purchase, making it more manageable
However, miss the
deadline and you may find yourself paying rates of interest than may run
up to as much as 30% and which may be backdated to when you originally
took out the credit agreement.
Make sure you keep a
record of all your payments so that you can prove you have made them in
case of any dispute.
This is the penalty
required if you fail to pay your monthly payment by the date specified
on your bill. Some lenders might give you a month's grace and not expect
a fee unless you've gone for two months without paying. This is
especially true if you speak to the lender as soon as possible, but
check the small print for details.
If you are unable to make
a payment because you are struggling with money it is really important
to tell the company that has lent you the money as soon as possible.
Under the banking code they are obliged to be sympathetic towards your
situation and most will help you rather than risk not recovering their
money at all.
Also known as Payment
Protection Insurance, this is insurance that is sold alongside a loan in
case you become ill or lose your job. Your lender may insist that you
take out an insurance policy with a loan but you do not have to. In most
cases the insurance they sell is very expensive with the majority of the
cost being commission that the lender takes. The insurance policy will
cover the repayment of the loan in the event of your inability to make
the repayments either through death or loss of earnings (but it will not
let you just walk away from the debt).
Loan insurance is not
cheap and may add a substantial amount to the cost of your loan. It is
easily possible that an otherwise attractive interest rate deal may
actually cost you more on a monthly basis than a loan charging a higher
rate because of the insurance charges. If you are keen to make sure you
are covered in these circumstances it is better to talk to an
independent insurance broker about a stand alone Accident, Sickness and
Unemployment policy, as this will be much cheaper, and provide better
cover.
Loan Term is the
expression lenders use for the number of months or years you'll be
borrowing for. Most terms are somewhere between 1 and 10 years, although
you might get a longer loan term if you're borrowing a large amount or
taking out a secured loan.
Some loans are flexible
which means you can pay them off before the end of the term you have
agreed, however many loans are not and in many cases there are
additional charges that have to be paid if you do try to pay the loan
off early.
Always check before
taking out a loan if you think you will want to pay it off early.
You make an overpayment
when you pay more each month to your lender than the stipulated required
monthly repayment. Do this on a regular basis and your loan will be
repaid ahead of schedule, before the end of the agreed term and you will
have saved yourself a substantial sum of money in interest charges.
These products are sometimes referred to as being “flexible loans”.
However, whilst
overpayment is allowed on many mortgages schemes, many loan products
will not allow them so check carefully before taking the product out if
you think you are going to want to make overpayments.
Also, if you think you
are going to want to settle a loan early check very carefully because
with many personal loans you have to pay an additional fee.
Payment Protection Cover
is the same as Loan Insurance, which is insurance against being unable
to pay your bills.
Your lender may insist
that you take out an insurance policy with a loan but you do not have
to. In most cases the insurance they sell is very expensive with the
majority of the cost being commission that the lender takes. The
insurance policy will cover the repayment of the loan in the event of
your inability to make the repayments either through death or loss of
earnings (but it will not let you just walk away from the debt).
Loan insurance is not
cheap and may add a substantial amount to the cost of your loan. It is
easily possible that an otherwise attractive interest rate deal may
actually cost you more on a monthly basis than a loan charging a higher
rate because of the insurance charges. If you are keen to make sure you
are covered in these circumstances it is better to talk to an
independent insurance broker about a stand alone Accident Sickness and
Unemployment policy, as this will be much cheaper, and provide better
cover.
This where a lender will
assess your level of risk and award you an interest rate based on this
risk. The lender will assess you as an individual rather than give
everyone the same interest rate and will base that assessment on a
variety of things such as your job, how long you have lived at your
home, whether you own your own home, and your past credit record.
Risk Based Pricing allows
high-risk borrowers to get loans where they would otherwise be turned
down. The lender will always quote a Typical APR which is the rate that
they have to give to at least 66% of the people that respond to an
advert, but the reality is you will not know what rate you will get
until you apply for the loan product.
Some lenders offer a
repayment holiday option of up to a few months. This means that if you
are running low on cash or you're temporarily unemployed you can ask
your lender to defer payments for a while. Needless to say, the amount
you owe will still accumulate interest while you're not paying it off.
These products are often
referred to as being flexible, and are usually the same ones that allow
you to make overpayments, or allow you to draw on additional funds when
required.
Be careful though as
quite often flexible products are more expensive than non flexible
products.
Repayments is the
expression used to describe the money you pay to your lender to pay back
your borrowings.
Your repayments will
usually be monthly, based on the amount you owe and the loan term you
choose. If you choose a longer loan term, your monthly repayments will
be lower but you will pay more interest over all. Late repayments will
adversely affect your credit rating if you do not contact your lender,
or ever pay the amount you owe them. You may also have to pay a fee if
you are late with a repayment.
Most lenders will insist
that you make your monthly repayments by direct debit.
The rule of 78 has now
been abolished as it was in many ways a sneaky way of charging the
customer extra if they chose to repay the loan earlier. The Rule of 78
is a complex formula which lenders use to calculate how much interest
you have paid at any stage during the repayment period. The number
derives from the 12 monthly parts of a one-year period, the sum of those
parts (12+11+10+9+8+7+6+5+4+3+2+1) being 78. In the case of a one year
loan, your lender will expect you to pay 12/78ths of the interest in
month one, 11/78ths in month two and so on down to 1/78th in month
twelve. Therefore, at the beginning of your loan period, a larger
percentage of your loan repayment is set against the interest than the
actual amount borrowed, and as a result, if you pay off the loan early,
you will have more of the actual loan amount to repay than you would
expect
This is also known as a
secured loan or a homeowner loan. It is where you borrow additional
funds, secured against the equity in your house, from a different lender
to your main mortgage provider.
The rate of interest on
your second mortgage is likely to be higher than that of your first
mortgage to reflect the fact you're borrowing more heavily and so deemed
to be a higher risk to the lender.
Although both of them are
secured on your property, the legal charge of a second mortgage ranks
behind or second to the "first" mortgage, making it a higher
risk for the lender.
This is also known as a
Homeowner Loan or a Second Mortgage.
It is where you borrow
additional funds, secured against the equity in your house, from a
different lender to your main mortgage provider.
The rate of interest on
your second mortgage is likely to be higher than that of your first
mortgage to reflect the fact you're borrowing more heavily and so deemed
to be a higher risk to the lender.
Although both of them are
secured on your property, the legal charge of a second mortgage ranks
behind or second to the "first" mortgage, making it a higher
risk for the lender.
The Typical APR is used
in conjunction with risk based pricing, and is the rate that is
advertised by a lender which they must offer to at least 66 per cent of
borrowers whose applications are successful. You will however not know
what rate they will offer you until you apply and they assess your
personal circumstances. This can have an adverse effect on your credit
record as applying will leave what is known as a credit footprint, and
some lenders take into consideration how many of these you have when
assessing you as an individual.
This means that the use
of a Typical APR is fundamentally flawed from the perspective of a
consumer and unfortunately lenders do not publish any information about
how many people they actually give that rate to.
Also known as a Personal
Loan, an unsecured loan is one that is not secured on the value of your
property. If you apply for an unsecured loan you'll be offered an
interest rate that's based on your circumstances and the amount you want
to borrow.
Some lenders use what is
called risk based pricing which means they have to advertise a rate that
they give to at least 66% of the people that respond to that advert.
Unfortunately you will not know what rate you will actually get until
you actually apply.
This can have an adverse
effect on your credit record as applying will leave what is known as a
credit footprint, and some lenders take into consideration how many of
these you have when assessing you as an individual.
As the name suggests,
with a variable APR your interest rate will change as the market changes
and your lender adjusts its charges. Conversely, with a fixed APR your
rate is fixed at the same level for the life of your loan product.
A lender should make it
clear to you before you take out the product whether the interest rate
is variable or not. Variable rates can be lower than fixed rates, but
come with the risk of being increased. Also, it is harder to budget as
you cannot be sure that your monthly payments will not change
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