The Rate Tart

TheRateTart Loans Guide

Contents

1. Introduction
2. Secured Loans
3. Unsecured Loans
4. Debt Consolidation Loans
5. Do I need a loan?
   • Luxury or a necessity?
   • Other ways to pay?
   • Lets make a deal.
6. How do I get the best deal on a loan?
7. Tips from TheRateTart
   • Early Redemption Charges
   • Flexible Payments and Drawdowns

Introduction

Although there are lots of different loans available, the range of loans types is actually quite small. The different types are listed below along with their main features and benefits.

Secured Loans

Secured Loans require the loan to be guaranteed against a property. Simply put, if you fail to pay back the loan the lender can re-possess your house to recover any outstanding debt. Because the risk to the lender is reduced, so are the interest rates. Conversely, the stakes are higher for the applicant if things go wrong . Amongst other factors, the amount you can borrow through a secured loan will depend on the amount of equity built up in the property. If you are tempted to spread the loan over the term of the mortgage, be aware this is likely to more than erode any savings arising from the reduced rate as the interest build up over a longer period.

Unsecured Loans

Unsecured Loans offer the loan company no guarantee of repayment. Even if you are a home-owner the loan company has no automatic claim to your property if you fall into arrears. As this is a higher risk than secured lending, interest rates are also higher. But don't be fooled into thinking that lenders will write off unsecured loans easily. If you fail to make your repayments you will almost certainly be taken to court and are likely to end up damaging your credit rating. If you do get into trouble the best approach is to inform your lender early and agree mutually acceptable repayment terms. As a rule of thumb expect unsecured loans to be available for amounts between £500 and £25,000. Repayment periods can extend from 6 months to 10 years.

Debt Consolidation Loans

Debt Consolidation Loans are a way to group credit from a number of different sources in one place . The main attraction of debt consolidation loans for most people is lower monthly repayments and reduced complexity in managing their finances. Debt from credit cards, secured or unsecured loans and overdrafts can be considered for inclusion. But be aware, lenders make this possible by;

1. Lengthening the overall repayment. By doing this the Total Amount Repayable is increased, even though the interest rates and monthly payments are lowered.
2. Securing the loan against property. This means that if you fail to keep up with repayments, the lender can repossess your property to get their money back. Be especially careful if the interest rates on the loan are variable. So although the rate is affordable now, there is no guarantee it will stay this way.

That's not to say you should never consider a debt consolidation loan. But equally it is not a decision to be taken lightly. First consider what other options might be available to you;

• Dependent on the size and source of your debt, it may be possible to transfer onto a 0% balance transfer credit card. Check out TheRateTart guide to credit cards for the best way to do this.
• Have you discussed your repayment difficulties with your current lenders? They may be able to offer revised terms and conditions that are preferable to a debt consolidation loan?
• Consider making an appointment with one of the free debt advise agencies. These groups are charity based and have no financial interest in placing you with one solution over another. The main agencies are the Consumer Credit Counselling Service, Pay Plan, Citizens Advice Bureau and National Debtline.

Last, but absolutely not least...taking out a debt consolidation loan DOES NOT mean your debt is cleared. It simply means you are paying the same amount of money back to a different company. Don't make the mistake of starting to run up more debt on the credit card or overdraft you have just cleared. The best thing you can do is close any credit card accounts and reduce your overdraft down to a safety net level. If you are still having trouble staying within budget consider visiting Citizens Advice Bureau again for help on budgeting more effectively.

Do I need a loan?

Taking on a loan is a sizable financial commitment. Amounts range from £1000 to £25,000 (or more if the loan is secured), so the repayments can represent a significant monthly expense. Before you decide to apply for a loan ask yourself these questions;

Luxury or a necessity? There are always going to be purchases that go beyond the limits of your current account or credit card. Loans can be ideal for these. But before leaping in, be honest with yourself. Is the debt you are about to take on necessary, or has the instant gratification impulse hijacked your brain? It's not that taking out a loan for a luxury purchase is always a bad thing (fun is good!). But if you are honest about your reasons, you are less likely to wake up with a big debt, a lot of regret, and a purchase you don't actually like...

Other ways to pay? You may have built up a nest egg, but don't want to touch it in case of rainy days ahead. This is a false economy. Interest rates on loans are always higher than on savings accounts so you may well end up losing money by taking this approach. And if that rainy day does come around, you still have to pay back the debt from your savings...plus interest.

Lets make a deal. If you've got this far and still need a loan, then the only question left to ask is 'have I negotiated the best deal possible on my new car/tv/holiday'. Just as it makes sense to use TheRateTart to find a great deal on your finances, there are plenty of sites out there where bargains can be found. Check out www.froogle.com, www.kelkoo.com or www.ebay.com (note, many merchants sell new as well as used items on eBay). Negotiating a better deal or buying 'nearly new' rather than 'brand new' can reduce the amount you need to borrow and reduce the amount you have to pay back in interest.

How do I get the best deal on a loan?

Shop around. Using a comparison site such as TheRateTart can make the process simpler by allowing you to research a range of deals in one place. Some of the factors to consider when making a decision are;

• Loan rates are generally better online than on the high street because these loans cost the lenders less to administer. If you are nervous about signing up for a deal online remember that unsecured loans up to £25,000 are covered by the Consumer Credit Act. This gives you a 14 day cooling off period during which you can cancel the loan if you change your mind.
• Focusing on APR alone will not give you the full picture. There are two main reasons for this;
  1. 'Typical APR' advertised may not be what you are offered. 'Typical APR' must be given to 67% of borrowers, but individual circumstances, for example your credit rating, dictate each offer. Before signing up make sure you are happy with and can afford the deal that has been offered.
  2. The best way to compare loans is the Total Amount Repayable. This includes not only the total monthly repayments, but any additional fees and charges bundled with the loan. This is why we include both Typical APR and Total Amount Repayable (TAR) in our product comparison tables.
• Review your budget and work out the maximum you can comfortably afford to repay each month. The faster you repay, the less interest accrues and the lower your Total Amount Repayable.
• The majority of unsecured loans are fixed rate, meaning the monthly repayments stay constant throughout the life of the loan. A minority offer flexible rates, meaning repayments can go up or down over time. If opting for a flexible rate include some slack in your monthly budget for the possibility of rate increases.
• If taking out a loan over an extended period consider checking periodically to see whether a better deal is available for the outstanding balance. To receive a free email alert when it is 'Time to Tart' register with TheRateTart. You can add any existing loans or other products to your profile and set an alert for the date of your choice (i.e. if the Early Repayment Penalty period ends 24 months into a 48 month loan, be alerted in 22 months) . And as a registered user we will store details of any products applied for through TheRateTart to make setting up alerts even easier. You can edit or remove these later if you wish.
• Payment Protection Insurance (PPI) is an add on product that guarantees to pay back your loan if you are no longer able to do so. But only under specific circumstances. Lenders are keen to sell PPI as the profit margins are high, and claims are relatively low. The Financial Service Authority and Office of Fair Trading have all recently been critical of PPI. The main concerns are the high costs to customers and concerns that many customers have been mis-sold policies. If you do decide to take out PPI, get the best deal by;
  1. Shopping around. You are not obliged to take out PPI from the company supplying your loan. Often you will be able to get a much better deal separately.
  2. Make sure the Terms and Conditions are right for your circumstances. For example if you are self employed the policy may not pay out if a downturn in business means you are no longer able to meet your repayments.

Tips from TheRateTart

This is not an exhaustive list but here are some tips:

Early Redemption Charges (also known as Early Redemption Penalties) Some loans impose charges if repaid in advance of the agreed term. These can be up to 2 months of interest. If you think there is a good chance you might be able to pay off the loan early, pick a product that enables you to do this with no or low charges. Obviously, this will need to be balanced against the interest rate offered.

Flexible Payments and Drawdowns Some loans allow the borrower to make under-payments, over-payments, draw-downs against repaid funds and other fancy features. All these options can appear appealing - you never know what's around the corner. But remember the main reason lenders offer these is as a way of making more money, not a deep concern for your future well being;

• Loans with flexible features are unlikely to have the cheapest APR or Total Amount Repayable on the market. Before paying the premium, consider how likely you are to make use of these features.
• If underpayments are made does the loan term stay the same or is it extended? If it stays the same, the interest accrued means you will face an increased monthly payment after your payment holiday. Will you be able to afford this? If the loan terms is extended , then the Total Amount Repayable will increase. If you find you need access to extra funds consider whether other sources such as a credit card with an introductory 0% on purchases offer may be better value.
• When drawing down against previously repaid funds remember that this will increase the Total Amount Repayable as you are effectively increasing your loan size. Also check that the new borrowing is repayable at the same rate as the original borrowing. If you find you need access to extra funds consider whether other sources such as a credit card with an introductory 0% on purchases offer.

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