Loans

How does it work

As a general rule, the interest rate offered will depend on the amount of money you wish to borrow and an assessment of your personal circumstances.

Usually, with a secured loan you can get cheaper interest rates. This is because a secured loan is guaranteed against some of your assets such as your home.  That means that if you cannot pay back the loan your home may be at risk.  An unsecured personal loan is not guaranteed against your home. So if you cannot repay the loan your home won't be at risk.

Loans normally show the Annual Percentage Rate (APR), this is the amount of interest you will be charged on any loan. The lower the APR the less total interest payable on the amount borrowed.  Although the longer the term of the loan, the longer you will be paying interest for, even though the payments may be for a smaller amount as it is spread over a longer period.

The key points

• With an unsecured personal loan, your monthly payments won't change. This allows you to plan your budget and monthly outgoings in advance.
• Personal loans are usually used for significant purchases such as home improvements, cars and special holidays. They can also be used to consolidate other borrowing such as credit cards or loans into a single monthly repayment, to give you tighter control of your finances.
• This type of loan can often be paid off before the agreed date, but you usually have to pay one month's addtional interest, because you are exiting a fixed term and fixed rate agreement early. Check with your provider if early exit fees apply.
• Your credit history will be taken into account when you apply for an unsecured personal loan. This may be a major influence on whether you are lent the money and also the interest rate you are offered.
• If your circumstances change and you find you are struggling to keep up with your repayments, talk to your loan provider as soon as possible. Defaulting on payments can affect your credit history, which will affect any future applications you make for credit including applying for a credit card or mortgage. 

Glossary

Appying for a loan may involve some unfamiliar words and phrases.  Here's a quick guide to some of the most common ones to help you.

AER

Stands for annual equivalent rate. This is the rate that is generally quoted as interest paid on savings and investments so that you can compare accounts. It is used to demonstrate what your interest return would be if the interest was compounded  (adding interest on to the balance then paying interest on the new higher balance) and paid annually instead of monthly (or any other period).

Affinity card

This is a credit card that has links to an organisation (usually a charity). When you open and spend on the card, the specific organisation will benefit with a donation. The Co-Operative Bank have over 12 charity cards including Amnesty International, Oxfam and Help the Aged.

ATM

Are 'Automated Teller Machines' which are often referred to as cash machines. You can access your money from an ATM at any time of the day. They also provide you with other basic services, such as balance enquiries.

Balance

This relates to the amount of money in your bank account.

Cheque

A cheque instructs your bank to pay a specific amount of money from your account to another person or organisation. You can also deposit cheques from other people into your account.

Credit

A payment into your account.

Credit limit

This is the maximum level of spending permitted on you card which is set by your credit card provider. If your over this limit you may incur charges and / or your card may be refused.

Credit scoring

This is the system that different banks, building societies and financial institutions use to decide whether they will provide you with a credit card and also to set the credit limit

Debit

A payment taken from your account.

Deposit

Money you put into your account.

Direct debit

This is an instruction from you to your bank or building society allowing someone to take money from your account. The amount of money taken can vary, but you must be told the amounts and dates beforehand. You can utilise Direct Debits to pay bills automatically from your account on a regular basis.

Fixed Rate

This is a form of savings account which will (in most cases) not allow you to access your money until the agreed term has finished.  The reward for this tends to be a higher rate of interest, which means you generally get more savings back.

Gross

The way interest is paid before any deductions e.g. tax/fees.

Interest free period

The time between when you buy something with your credit card, to the date when you need to pay your monthly bill.  This can be as much 45-50 days and is generally interest free. Therefore if you pay the full outstanding balance by the payment due date, you will pay no interest

Interest rates

Are important because they effect how much it costs you to borrow money and how much you earn on any savings you may have.  Borrowing becomes cheaper when the rate goes down and dearer when the rates go up.  Savings earn less when the rate goes down and more when the rate goes up.

Interest rate

The percentage rate that is paid on every £1 saved or borrowed with the bank.

Individual Savings Account (ISA)

Allows you to save money up to £3,600 in a cash deposit ISA without having to pay any further tax on your returns.  UK residents over the age of 18 each have an an allowance of £7,200 each year to save within ISAs.

Introductory rate

Some cards offer an introductory rate which is an APR that applies for a limited period of time when you take out the card.

Instant access

This is a form of savings account which enables you to have access to your money without delay.

Net

The amount of interest paid after deduction of income tax (or other fees).

A Payee

When a cheque is made out, the person or organisation that it is made out to is the payee.

PIN

PIN stands for Personal Identification Number and it is the four digit security number you will use when you are taking out money at an ATM or making transactions using your debit card.

Secured loans

A secured loan is a loan where you are required to secure an asset which belongs to you, such as house or car as security against the loan, to enable the lender to balance out the risk of lending. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

Sort code

This is a six-digit number that forms part of your account details and identifies a specific branch of the bank.

Standing Order

A standing order can be set up if you want to transfer a specific sum on a regular basis to another account. This can be used to make regular savings from a current account to a savings account.

Unsecured loans

An unsecured loan doesn't require any security to be provided, and is generally available for lower amounts over a shorter term.

Useful Links

Here are some useful links we find helpful and thought you might feel the same.

• https://www.bettermoneyskills.com - Better Money Skills Is for everyone who wants to manage their money better.
• http://www.moneymadeclear.fsa.gov.uk - Money Made Clear prides itself on: No selling. No jargon. Just the facts. This is part of the Financial Services Authority (FSA).
• http://www.citizensadvice.org.uk - The Citizens Advice Bureau (CAB) is a service that helps people resolve their legal, money and other problems by providing free information and advice.
• http://www.financial-ombudsman.org.uk - The Financial Ombudsman Service (FOS) look at complaints about most financial matters including: banking, insurance, mortgages, pensions, savings and investments.

Tools

Use our budget calculator