Credit can change at an alarming rate in the UK, both in terms of availability and the products which are being offered. The recent financial turmoil (which began in 2008) has upset banks, lenders and other financial institutions causing them to change their offerings, tighten the accessibility of their products or even pull out from the market all together.
The finance solutions that the average consumer may have turned to in the past, say for consolidation or home improvements, may not be as readily available to them; instead they may have to seek out a different type of finance product or settle for a higher rate of interest. With all this in mind it should be a priority to know what types of loan and credit are currently available if you’re seeking finance so you can determine which is the best and cheapest option! Current Options include;
Unsecured loans are the traditional favourite route taken when seeking loan amounts of up to £25k, normally suited for substantial home purchases or improvements. However, they’re not as easy to obtain now as they were a few years ago. You’ll need a good credit rating and a good employment record to be in with a chance of being accepted. Rates are currently in the region of 7% to 30% APR.
Guarantor Loans came about as an alternative for people who couldn’t get an unsecured loan due to a poor credit record or adverse circumstances. Loan amounts are typically up to £5k and the state of your credit history isn’t normally much of an issue. You need a supporter to vouch for your application, this party is called the guarantor and they can be held jointly responsible for the loan. Rates are currently in the region of 48% to 79% APR.
A Secured Loan (also referred to as a Mortgage or 2nd Charge) is a debt which is tied to your property. You need to be a homeowner to be eligible for one and your home could be repossessed if you don’t keep up your repayments. The extra security means that your credit record doesn’t need to be as clean as if you were applying for an unsecured loan. You can usually borrow up to £100k , depending on the equity in your property and can spread repayments over longer terms. Rates are currently in the region of 3% to 18% APR, which usually makes this type of credit the cheapest.
Payday loans are designed to give you a cash boost until you next get paid, when you are then expected to repay your debt in full. Because this type of loan is designed to be borrowed over such a short period of time, the interest rates can seem over inflated – this is to offset the risk for the lender and therefore make the loan more accessible. Your credit history doesn’t usually need to be perfect to obtain a payday loan. Rates are currently in the region of up to £3000% APR. In the context of an annual rate, this is often seen as excessive.
Log Book Loans
If you own a vehicle then you may be able to apply for a “log book loan”. These are like secured loans, but instead of being secured on your home, they are secured on your car. You can usually borrow up to £3k and your credit history doesn’t need to be clean, although interest rates can be high. Rates are currently in the region of 450% APR.
Credit Card/Store Card
Another long-standing favourite (along with the personal loan) is the Credit Card. Credit cards are still widely available, although the interest you pay will depend greatly on your credit history and current situation. If you are looking for credit which allows flexible repayments and flexible borrowing, then a credit card may be for you. Credit cards normally come with an interest free period, which suits them for shopping expenses which you can pay off when you next get paid. Rates are currently in the region of 6% to 50% APR.
Catalogue accounts have been around for decades and allow you to buy goods at home for delivery and pay for them in instalments (or on the tick as it was once called!). Most catalogues have interest free repayment terms, although you may find that the cost of the goods is over inflated when compared to other shopping outlets to compensate for this. Most people will be able to obtain a catalogue account. Rates are currently in the region of 20% to 40% APR. Excluding the interest free periods offered by most catalogues.
If you are looking to buy a car or some white goods, then hire purchase may be offered to you at the time of sale. Rates can vary wildly, although good deals can normally be found on new car purchases. If you are offered hire purchase, make sure you weigh up the cost of the credit against other borrowing options such as credit card or purchasing the item from a catalogue. Rates can vary from 0% to 60%
So Which is Right For You?
Always weigh up your options carefully before proceeding with a credit option. Be aware that making multiple applications can harm your credit history, so try to not apply for credit which you will probably be turned down for. If you are unsure, speak to an independent financial advisor or take a look at the Government’s Money Advice Service.
Graphic sourced from http://www.guarantorloanscompany.co.uk/blog/understand-your-credit