Many households are struggling to make ends meet as the cost of living keeps rising. There’s little spare cash around to build up an emergency fund, which means it can be tricky to pay for a new washing machine or boiler if your old one breaks down. Maybe you need a new car, or perhaps you’re planning a holiday, a wedding or a home makeover?
Pros and cons of loans
Let’s face it, most people at some point in their lives need to borrow some money. So it’s important to understand the pros and cons of the different types of loan, as well as how to secure the best rates. If not, you could end up with a poor deal – and costly credit can send you into a downward debt spiral.
Loans can broadly be divided into two categories: secured and unsecured. With a secured loan, the lender will insist on some sort of security against the money you borrow, often a house or car. If you default on the payments, the bank or building society can then sell the asset to clear the debt.
You can usually borrow large amounts with a secured loan, and at a lower rate of interest. Plus, you can pay back the debt over a long time period, perhaps ten or 15 years.
However, secured loans are more risky than unsecured loans because you could lose your collateral if you cannot clear the debt. You should therefore think very carefully - and consider other options - before taking out a secured loan.
An unsecured loan, often referred to as a personal loan, is not secured against any asset. Of course, you still have to pay the money back and the lender could pursue you into court if necessary to get its money back. But you don’t have to put up your house or car as collateral.
Help with budgeting
You can typically borrow as little as £1, 000 up to a maximum of £25, 000 with a personal loan. The interest rate is usually fixed and you pay back the debt over a set term, normally one, three or five years. Personal loans can therefore help you to budget because you know at the outset the full cost of your borrowings and how long they will take to clear.
For example, if you are getting married and the wedding is set to cost £7, 500, you could take out a loan for £7, 500 at 5% over three years. Your monthly payments would be fixed at £224.41 and you would pay total interest of £578.76 over the 36-month term.
If you have run up other debts at high rates of interest, a personal loan can be a good way to manage your borrowings and bring down the cost. Let’s say you have built up a debt of £3, 000 on a store card that charges interest of 29%. You could take out a loan for £3, 000 at, say, 8%, to pay off the store card balance and reduce the monthly payment.
If you also cut up the store card, you would not be tempted to go on a spreading spree and add to your debt burden!
Interest rates on personal loans vary across the market, but as a rough rule of thumb, the more you borrow, the lower the rate. For example, you might pay interest of 9% on a £3, 000 loan, but only 6% on a loan of £7, 000. It can therefore make sense to borrow a larger amount, say £7, 000 instead of £6, 500.
Just make sure you don’t take on a debt that you cannot afford to repay.
Term of the loan
The size of the loan will to some extent determine the term of the loan. It is, for example, difficult to pay off a £7, 000 loan in just one year as the monthly payments would be relatively high. However, if you borrow only £1, 000, a term of 12 months is more manageable.
You also have to consider the cost implications of the loan term as the longer the term, the lower the monthly payments – but the higher the total cost.
For example, let’s say you borrow £3, 000 over three years at 7%. The monthly payments would be £93, so you would pay total interest of £348. If you extended the term to five years, the monthly payments would drop to £60, but you would pay £600 in total interest.
The interest rates on personal loans depend partly on the loan amount and term. But lenders also assess your credit worthiness, usually by looking at your credit file. The lowest rates are reserved for the best customers – that is, borrowers with a spotless credit record.
If you are judged likely to default on the loan because of a poor credit history, you will be charged a higher rate of interest or your application will be turned down.
In other words, there is no guarantee that you will qualify for the advertised rates. Lenders are allowed to boast of low representative rates if those rates are charged to 51% of successful applicants, which means almost half could be charged a higher rate.
Bad credit loans
Some companies specialise in lending money to people with a poor credit record. The rates of interest will undoubtedly be high, but a bad credit loan can help you out of a tight financial spot. It can also help you to clean up your credit file.
If you keep up the repayments, you can prove to other lenders that you can manage your debts and so improve your chances of getting a better deal next time. Alternatively, people with a low credit score might be more successful if they apply for a secured loan.
If you are refused a loan, try not to make too many further applications as each one leaves a footprint - and lenders are wary of people who frequently apply for credit.
You can pay off your debt before the end of the loan term if you come into some cash. But watch out for early repayment fees. Many lenders levy a penalty for early repayment, which could wipe out any potential interest savings.
Some lenders also charge arrangement fees for personal loans, which you should factor into your cost calculations.
Payment protection insurance
A lender will probably try to sell payment protection insurance (PPI) – sometimes known as Accident, Sickness & Unemployment cover – when you take out a loan. PPI is intended to cover the loan payments if you cannot work, perhaps if you lose your job or fall ill – and it can be useful. However, it’s important to read the small print of any policy and to understand the various exclusions.
Pfeiffer Vacuum Technology AG is a German manufacturer of vacuum pumps. It is headquartered in Asslar in Germany with 70% of the total production catering to the export market.
In July 1996 the company was listed on the NYSE and in April 1998 on the TecDAX. Due to low trading volumes, it was de-listed from the NYSE in October 2007.
WTAS LLC, founded in 2002 by 25 former public accounting firm partners, is one of the largest independent tax firms in the United States, providing a wide range of tax, valuation, financial advisory and related consulting services to individual and corporate clients across the country. As an independent advisory firm that is not affiliated with...
1942 Photo Santurce, Puerto Rico. Workers at Rodriquez needlework factory waiting in line to make payments on personal loans made by the company Location: Mayaguez Municipality, Puerto Rico, Santurce
Home (Historic Photos)