The Ultimate Personal Loan Guide Chapter One - Need to Borrow Money? The Rundown on Personal Loans.

Need to borrow money and thinking of taking out a personal loan? It is hard to know which option is best. We at Personal Loans Now, a responsible payday loans company regulated by the FCA, want to make sure you know of all the options available so you make the right choice.

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Learning Highlights
  • Learn about personal loans some of the historical backgrounds to borrowing money in the UK
  • Figures showing personal debt in the UK
  • Unsecured and Secured loans

What Is A Personal Loan?

A Personal Loan in its most basic form is a contract between a lender and a borrower. The Lender (usually a large bank or finance corporation) provides a sum of money to the borrower. The borrower pays back the principal (amount borrowed) and some interest (sum charged for borrowing). The pay back is over a specified period of time. Loans vary but are usually between £1,000 and £15,000. Loans are categorised as unsecured or secured.

Borrow Money In The UK: The Background

Until the 1970s the only kind of loan available to most ordinary people in the UK to borrow money was a mortgage to buy a home. Mortgages were strictly controlled. Only provided to those who had saved up a large deposit and who met strict criteria regarding their financial status and earnings. Most women were not allowed to take out a mortgage even if they were full-time employees in a responsible job.

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At that time, people bought other large purchases by saving up the total amount needed or by using a ‘hire purchase scheme’. A contract for hire purchase involved the purchaser signing a contract to pay for the goods over a set period of time. They did not actually own the goods until the last payment had been made. Again, women were usually prohibited from entering into a hire purchase agreement unless they had a male guarantor. This was usually a father or husband, who would undertake to make the payments if the woman buyer did not.

Discrimination Towards Women Who Wanted A Personal Loan

The Sex Discrimination Act of 1975 outlawed the discrimination against women taking out loans. Included in this were guarantor loans, mortgages and credit cards. However, even as far along as 1978, some retailers were still asking for a male guarantor for lending contracts.

Unpaid Hire Purchase Contracts

Failure to keep up with payments on a hire purchase agreement meant that the goods could be repossessed. It was not uncommon for the bailiffs to come. They could take back a television or a car from people who had not kept up with payments. They also took if you had got into too much debt. Repossession of a house was unusual

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Regulations around hire purchase agreements were scarce until 1965. Many people were seduced by the promise that they could ‘buy now, pay later’. This slogan was often used as a marketing ploy. It led to many unethical traders and lenders charging high rates of interest.

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Times Were Changing In Banking

In the late 1960s, there was an increase in full employment in the UK and an increase in the amount of available money for spending plus an increase in a number of new types of consumer goods. It led to a loosening of the regulations in banking. For the first time, ordinary people were allowed to borrow money from the bank to buy a car or some other large purchase. Credit cards became more freely available to the general public (including women) so they could borrow money.

The availability of loans became even wider and were easier to get after further banking de-regulation in the 1980s and 1990s. Personal debt in the UK began to rise spectacularly during this era.

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Almost unlimited credit began to be offered to young people with low incomes, students, people who were unemployed. Background checks were often sketchy, to say the least. The era of personal loans was well and truly upon the younger generation, and they embraced it wholeheartedly. In spite of regular warnings about the increase in personal debt, the public has continued to borrow at alarming rates.

Current statistics show that people in Britain will pay over £50 billion in interest on loans and other types of credit during 2017. This breaks down to an average of over £1,000 per person. The salient fact to focus on is that this is just the ‘interest’ paid for borrowing. i.e. it is dead money. This staggering figure means that the amount of debt owed by people in the UK in 2017 comes to more than £1.5 trillion. Look at money charity for more statistics.

Before considering taking out a loan, think about whether you really need to borrow. There may be another avenue to go down without increasing your personal indebtedness. However, if you do need to borrow then careful planning and getting all the loans information available will help you to find the best deal that is affordable.

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Cheap Personal Loans

Offers for the cheapest loans rate with no credit checks suck you in. The dream of getting that brand new car, a larger flat screen smart TV, an exotic foreign holiday or a top of the range Hi-Fi system is very attractive. Also, when shown the monthly amount of repayments, it can be tough to say no. Personal loans comparisons are easy to find. For example, look online on money advice websites, and this is where can get information.

Use an online loan repayment calculator. It is one way of addressing the advisability of taking on another monthly payment in addition to your usual outgoings. This tool will allow you to work out exactly how much you can afford to borrow.

Lenders Are In The Business Of Profits

It is important to remember that personal loans direct lenders are in the business of making high profits for their shareholders. Unless you have a full understanding of the terms and conditions of the contract, you could end up with money problems.

Financial lenders often enter into a price war over interest rates to gain more business than their rivals. Some may be less than forthright about whether taking on a loan is in an applicant’s best interests. It is the sales figures that are of major importance. While many lenders are now using a more ethical approach to loan offers, profits are still considered to be a most important factor.

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What Can Go Wrong With A Personal Loan Agreement?

Borrowing money is quite normal in the 21st century. You may be thinking that if you have a steady job and some spare cash each month, what could go wrong? In short a lot. You could lose your job; become ill; lose some of your income and be unable to repay the loan. You could be optimistically overstretching your monthly budget. You can become convinced that you can afford the loan when in reality the truth is you can’t.

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It might be tempting to take out a loan when one lender has turned down an application, and the other says ‘yes’. In reality, this is usually down to profits because the one offering the money is going to charge a higher rate of interest.

It is also tempting to apply for more money than you need only because the offer is there on the table. Or, you may be turned down if you apply for a larger amount and this can affect your future credit score.

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What is important to remember is that the more money you borrow, the more interest you will pay. Borrowing money even when using loans with a low APR is never for free. You can end up paying back huge sums in interest (depending on the term).

How To Approach The Business Of Borrowing

Who Can Apply For A Personal Loan?

Personal loans are available to many groups of people. They include students, homeowners and tenants and individuals with a poor credit history. You can borrow money to buy a car, add an extension or a conservatory to your home and even use the funds to pay for a luxury foreign holiday.

There are a vast number of loan deals on the market, and all of the lenders want you to borrow from their company. Lenders advertise attractive headline personal loans interest rates, offer an instant same day payment into a bank account and give endless promises that the process is straightforward and pain-free.

Unethical Lending Practices

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Some companies offer loans to people who already have debt problems. It is not illegal at present, although regarded as highly unethical. There has been some tightening of regulations both for direct lenders and loans brokers. Mainly the banks and finance companies must follow ethical lending guidelines, although some do not.

The Standards Of Lending Practice is a voluntary code which covers loans, overdrafts and credit cards. It is not always enough enforcement of the code by the Lending Standards Board to protect everyone. Having sufficient information about the loans business will help you to protect your interests before you make an application to borrow money.

Researching Personal Loans

Undertaking some research is essential before you embark on a contract for a loan. It may be cheaper to borrow on a 0% interest credit card if the repayment period you need is going to be within the 0% period.

There might also be an option of taking some equity out of your home. With the historically low-interest rates that are current, an extension on a mortgage is always going to be a cheaper choice than a personal loan. However, borrowing on your home does present more of a risk than taking out unsecured loans.

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Do You Need To Borrow Money?

The most important question to ask is whether you need to borrow money. Also how much do you really need? There is usually a limit to some funds available for a loan. It will depend upon individual circumstances. Typical amounts are between £1,000 and £15,000 although recently one UK bank upped the higher limit to £50,000. Only a few years ago this sum would have been much more likely to be a mortgage to buy a first home. Now it can be a personal loan.

Secured Personal Loans

This kind of loan is taken out on the understanding that if you fail to make repayments, you could lose whatever collateral you have put up. It might be your home or business premises. Therefore, a secured loan is always going to be risky and should not be taken out unless you are fully convinced you can pay the sum back.

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Unsecured Personal Loans

The majority of loans class as unsecured. This means that you do not need to put up any collateral to get the loan. An unsecured loan will always cost more than a secured loan because the lender is taking a greater risk that the borrower may default on the repayments.

There may also be a setup fee when you apply for an unsecured loan and costly consequences if you do not make repayments on time. All of these facts should be thoroughly thought through before you consider taking out a loan.

Don’t Jump In – Take Your Time

There are a few of the important considerations that should be made before applying to borrow money. It goes without saying that choosing a reputable lender to borrow from is top of the list.

Check out the rest of the Personal Loans Now’s Guide to find out how to borrow money from a legitimate lender. Learn all you can about the benefits and drawbacks of borrowing and most importantly ask yourself some searching questions before taking on debt in these most difficult economic times.

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Summary to Borrow Money

Personal loans involve borrowing a lump sum (the principal) and paying that amount back with interest over a set period. Loans are now less restrictive and available to far more ordinary people than in the past. A loan is not the same as a hire purchase agreement.

Household and personal debt in the UK is still on the rise. Many lenders offer headline rate cheap loans as a way of attracting more business but only a reputable and registered lender should be used when borrowing money. Good research is vital before you make an application.

You can click here to read about Funding Circle and Wonga, why one succeeded and one failed.

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