The economy in the UK, like many others across the rest of the world, has since been on a downward spiral, leading to a deep and continuing recession, which is the worst that the majority of individuals are able to remember and although we are slowly starting to see the first glimmers of signs of recovery, it is likely to be a long time before we are able to say that the economy has recovered fully and got back to the position it was before the credit crunch struck.

Although many people hold the Government responsible for the current state of the economy, they have taken significant action in specific areas of the economy in order to stop matters becoming worse than they already are. But what has been done to ease the problem, how long will it take to repay the loans and other debts accrued by the government along the way and where are the areas which have directly benefitted the average man in the street, who may be struggling to make his budget stretch to cover his monthly loan commitments and other bills, or possibly looking to take out a new loan to purchase a new car for example, or a home owner loan in order to move house, or get himself onto the housing ladder as a first time buyer.

In this article we will look as a few of the schemes which have been introduced by the Government and what benefit these may or may not have had for various individuals.

Probably the most notable scheme the government has carried out has been the quantitative easing programme of introducing more capital into the economy and the huge loans which have been granted to various banks in order to stop them going out of business.

Although this has cost the tax payer in the UK hundreds of billions of pounds in loans, all of which will have to be paid back in some form of tax increase eventually, these schemes have managed to keep the cash flow of the economy going, allowing people to spend money on the high street and therefore support businesses and it would be hard to imagine a world without a banking system, or a facility for a person to obtain the personal loan or home owner loan they require.

Despite the fact that many of the loans to banks are in the process of being repaid to the government, many of these institutions have been split, with the Government retaining the portion of the businesses which hold the “toxic” loans and other bad loan debts, effectively writing off this portion of the loan debt and placing the burden with the tax payer.

With regard to looking after those people with existing home owner loans and mortgages, who may be struggling to keep up with their loan repayments due to unemployment or reduced pay or working hours, the Government has increased and extended the benefits available under the income support rules for mortgages, as well as tightening up the rules for banks and building societies to be able to take action against borrowers for repossession proceedings, having the effect of keeping more people in their homes, who might otherwise have lost them due to increasing loan arrears.

Of course, the other, more obvious benefit has been that of the Bank of England reducing interest rates on home owner loans to the lowest point in history, thereby having the effect of reducing the monthly home owner loan repayments for thousands of individuals, in some cases by hundreds of pounds every month and making it much easier for these borrowers to manage their monthly budget. 

A couple of the more immediately obvious schemes which have been introduced by the government are the car scrappage scheme and also raising the threshold for stamp duty on house purchases from £125,000 to £175,000.

The car scrappage scheme was introduced for an initial period to encourage people with cars more than ten years old to trade them in for a brand new vehicle, providing that they had owned the car for at least twelve months. The scheme offers a minimum scrap value of £2,000 to the buyer on their old car, if they trade it against a brand new model. This scheme has been very well received by all and has provided a welcome boost to the UK motor industry.

Many car dealers have even extended the offer by increasing the scrap allowance, or reducing the price of a new car, or offering incentives such as a cheap loan or an interest free car loan. the car scrappage scheme has been a success on several fronts; firstly it provides a much needed boost for the motor trade throughout the recession, secondly it allows people to trade up to a brand new vehicle, where they maybe could not have afforded to do so previously and also it removes older, more polluting cars from the road, having a positive impact on the environment.

The car scrappage scheme has now been extended to the end of February next year and we shall see then if it is to be continued after that period.

The other popular government scheme has been the stamp duty holiday.

The housing and home owner loan markets have been one of the worst hit areas of the economy during the recession and to encourage first time buyers back in to the housing market and apply for their first home owner loan, the government has raised the threshold for stamp duty land tax payments from £125,000 to £175,000.

Although many experts were cynical about this scheme, due to the fact that most houses cost more than £175,000, it has proved popular and has worked in attracting first time buyers into the market place, with an increase in both property sales and new loan applications. A total possible saving of £1,750 may not seem to be a lot in the grand scheme of things when it comes to buying a house, but it has been just enough of an incentive for many to make the step on to the bottom rung of the property ladder.

Many experts have called on the Government to make the holiday permanent, or at least review the stamp duty system to make it more realistic for the twenty first century, but the Chancellor, in his pre budget speech recently, said that the holiday would end on the 31st December this year and we have already started to see the impact of this decision on the market, as the number of first time buyer loans and sales has dropped significantly from their peak this summer, when around 43 per cent of home owner loans were taken out by this sector of the market.

So as we look forward to 2010 and many experts are saying that the UK will finally leave recession behind and start to see positive growth once again, it will be interesting to see what action the Government takes to continue or abolish the various schemes it has introduced. This is likely to be a fine balancing act, as continuing the schemes indefinitely will increase government debt and therefore the eventual bill for the tax payer, but if these various schemes are cancelled, it could have a negative impact, throwing the country back into a second wave of recession, an example of which we have already partially seen with the end of the stamp duty holiday.

Either way, we are likely to be in for a long and slow recovery, but it is probably safe to say that we would have been in a much worse position than we currently are, if the Government had done nothing at all. We wish you all a merry Christmas and look forward to hopefully a prosperous new year!

Sorry, I got a little distracted there, but quite often the prospect of Christmas approaching and all the festivities that go with it, can have that effect on people, particularly when it comes to spending money, or in many cases borrowing it through personal loans and credit cards.

Many people living in the UK at the moment have just experienced possibly the worst couple of years in their lives, with regard to their personal financial situation. Debt levels on personal loans and credit cards have soared, as individuals use borrowing to supplement their falling income and wage cuts and rising unemployment has caused an increase in the number of people being declared insolvent, or even bankrupt.

But let’s not worry about all that at the moment, because Christmas is on its way and we can all forget about our financial woes for a short period of time and spend what little money we have left on expensive presents for each other (which the recipient usually either doesn’t want or need!) and fuel the supermarkets profits by purchasing excessive food and drink, which will only leave us with indigestion, a hangover and probably a diet in January!

In case you weren’t aware, that last paragraph was largely sarcasm! Just because Christmas is approaching doesn’t mean we can forget about our existing personal loan debts and other monthly commitments, they will all still be there in January, but for many individuals the prospect of receiving their January credit card statement, or looking at the overdraft level on their current bank account is likely to have an extremely sobering effect on them and in some cases induce panic as they wonder how on earth they intend to pay for the excesses of the festive season.

Many individuals are likely to start thinking about Christmas around this time of year, closely followed by worries and concerns over how they intend to pay for it. Some more forward thinking individuals may have been saving up in a separate bank or building society account, or even through a Christmas club over the course of the year, but with money being tight for many people this year due to the recession, in many cases such saving is one of the first things to be stopped, leaving people with a distinct lack of funds to pay for their Christmas shopping.

The sensible course of action is, of course, to simply cut down on expenditure on presents, food and booze, but with human nature being what it is, for the majority of us this simply will not happen.

So how will people pay for the festive season this year? Many individuals are likely to just spend without regard for the consequences and then receive a nasty shock in January, when they receive their credit card bill. This additional commitment could be too much to bear for some people, who may already be up to the limit of their finances and can not afford any further monthly outgoing on debt repayment. For these people, a debt consolidation loan may be the answer.

A debt consolidation loan can be used to roll up all an individual’s debts on various unsecured loans and credit cards into one monthly repayment amount, which is usually considerably cheaper than the sum of all the previous loan and card repayment commitments. It is important to ensure that the interest rate payable on the debt consolidation loan is lower than those of the debts which are being repaid, otherwise there is little point in the exercise. Similarly the term of a debt consolidation loan should be considered carefully. If the term of the new loan is considerably longer than the existing loan and card debts, then the borrower could still end up repaying more, even if the monthly repayments are lower, due to paying additional interest for a much longer period of time.

Other individuals who are faced with the prospect of Christmas shopping without any money are likely to consider taking out a personal loan of some description in order to cover the cost. This time of year is traditionally an extremely good time for doorstep lenders, who offer small, cash loans to individuals who are unlikely to be able to obtain a personal loan from a bank or other mainstream loan company.

These loans are often for sums less than £500 and due to the availability of these loans for people with a poor credit history, the interest rate is usually extremely high and makes this option one of the most expensive ways to borrow money. Most people taking this route are unlikely ever to consider the APR (Annual Percentage Rate) they are paying, just as long as they are able to get some cash in their hands to enable them to cover their Christmas shopping.

For individuals with a better credit rating, a personal loan from a bank is usually a better option for a cheap loan, although borrowers should still be wary of these. People taking out a personal unsecured loan for Christmas are only likely to need a relatively small amount, compared with the average loan size. Loans for under £5,000 (and certainly under £1000) tend to carry with them some of the highest interest rates and in many cases it would be cheaper for the borrower to find a low rate or interest free credit card, for these sort of borrowing levels.

It is also important to consider the term of a loan for Christmas. Although it may be tempting to take a loan out over a few years term in order to reduce the repayment levels, this would mean that the cost of one Christmas has been extended over several years and if people need a loan every Christmas…….well you can see the immediate problem straight away! (if you can’t, you really shouldn’t be applying for a loan at all!!) Therefore, the maximum term of a loan for Christmas should be twelve months and although this will increase the monthly repayments, it will make the loan cheaper overall.

It can often be a difficult time financially for people at this time of year, but it is vitally important to maintain a sense of perspective under the circumstances and not over commit to loans and other debts which will hang over you for years to come. It is easy to say that we should all save up for Christmas over the course of the year, thereby avoiding all the problems and worries face by the majority of the population, but well organised people will do this, having the cost of Christmas covered well in advance.

It is true to say that I started this article in a fairly light hearted spirit, quoting lyrics from a well known Christmas song, but perhaps Mr Noddy Holder is more perceptive than we all realise, when you listen to the next line of the song……”look to the future now it’s only just begun!”

In past times, this was particularly socially unacceptable and those who could not afford to repay their loans and other debts were thrown in the debtor’s prison. If this were still the case today, the prisons in the UK would be even more overcrowded than they already are.

Personal debt on loans and credit cards is still continuing to grow, despite the recent recession and slow down in the economy and with the total amount of personal debt in the UK standing at around £1,457 billion, excluding home owner loans, mortgages and secured loans, it is little wonder that an ever increasing number of individuals are struggling to keep up with their monthly loan repayments.

In many cases, people are falling behind with their loan repayments and building up significant arrears on their personal loans and credit cards, whilst actually increasing their debt levels to make ends meet, rather than reducing the amount they owe.

So, what should someone in this situation do to get themselves out of what inevitably becomes a downward spiral of debt? There are a number of options available to people who are struggling to manage their finances and the course of action taken will depend on the magnitude and severity of their debts. Some of the options are discussed below, but it is important not to rush into the first option which presents itself, as this could actually make matters worse in the long term.

Debt Consolidation Loan

For those individuals who have a number of personal loans and credit card balances outstanding, it may be possible to take out a debt consolidation loan, providing that all the existing loans and debts are up to date and have no outstanding or previous arrears problems.

The purpose of a debt consolidation loan is to combine a person’s various debts into one loan and therefore only have to deal with one monthly repayment amount. A debt consolidation loan may be an unsecured loan, or secured on the borrower’s property, depending on the amount borrowed. It is important to ensure that the interest rate charged on the new loan is less than those of the debts which are being repaid, there is no point switching a credit card with a zero per cent rate to a loan with a ten per cent rate, for example.

In many cases, the term of a debt consolidation loan is longer than those of the debts being consolidated. Although this will reduce the monthly repayment amount, interest will be charged over a longer period and therefore the loan may work out more expensive than the previous debts over time.

Debt Management Plan

If it not possible to be accepted for a debt consolidation loan, the next step is often to apply for a debt management plan. This type of plan is usually managed by an independent company who will deal with all the various loan and credit card companies on behalf of the borrower. The management company will negotiate with all the various creditors and agree a reduced monthly repayment amount which is affordable for the borrower. The borrower will then make a single monthly payment to the debt management company who will distribute the funds accordingly.

They are also likely to charge a fee for their services which will be included in the monthly amount and the borrower should check on the amount of this before committing to the plan, as it could be significant. The benefit of a debt management plan is that the company will deal with your creditors on your behalf, although it is possible to come to an arrangement with loan and card companies directly, which is likely to save money, but the borrower is doing the work themselves.

Taking out a debt management plan is likely to damage an individual’s credit rating, although someone in the position where they are looking at this option is probably already in this position and such a plan could help to repair it over a longer period and it is a less formal course of action than an individual voluntary arrangement.

Individual Voluntary Arrangement

Individual Voluntary Arrangements (IVA’s) are for people with severe financial problems and are in arrears and unable to keep up with their repayments on a number of personal loans and credit cards.

An IVA should only be entered into if all other options are unavailable and it is the final stage to stop a person from being declared bankrupt and as such it will have a similarly damaging effect on a person’s credit rating for at least six years.

An IVA is a formal agreement between the borrower and their creditors and is overseen by an insolvency practitioner. Both the borrower and the loan company (or other creditor) agrees to pay a percentage of the debt over a fixed period of time and the borrower is committed to making a single monthly repayment to the IVA company, if these payments are not maintained, the borrower may be declared bankrupt.

Assuming that all the repayments are maintained, after the full term of the IVA (usually 5 years), the borrower is declared free of unsecured debts covered by the IVA, whether the full loan amount has been repaid or not, although they are likely to find it almost impossible to obtain any form of personal loan or other credit for a considerable time after the IVA has finished. As we have previously said, an IVA is the last resort before bankruptcy.

Bankruptcy

Bankruptcy really is the last resort for someone with credit problems, encompassing large loan and credit card debts with arrears and probably defaults and CCJ’s (County Court Judgements) registered against them and will have a severe impact on the borrower’s future credit rating.

Bankruptcy should only be considered when all other possible solutions to the problem have failed. When someone is declared bankrupt, all their assets, including their home and other possessions may be seized in order to repay outstanding debts and they will be unlikely to be able to get any form of loan or credit during the bankruptcy period, which will last for three years.

Even when a bankruptcy has been discharged, it will be difficult to obtain a loan for anything other than minimal amounts. Other assets, such as an inheritance may also be seized to repay debts and someone who has been declared bankrupt will never be able to take a position as a company director, an MP, a Councillor, or be able to work in the finance industry or as an estate agent.

A bankruptcy is a matter of public record and will be published in the local press, so family, friends and any people you have had business dealings with, will be aware of the situation. Bankruptcy is a drastic course of action and should only ever be considered as a last resort.

In Summary

All of the above choices are only intended as a guideline and to provide some basic information on the various options which are available to someone in financial difficulty. Although it is essential to take action sooner rather than later in order to deal with loan debts, it is vitally important not to rush into a particular option without considering the alternatives. A sensible option is to take professional advice from either a financial adviser, debt counsellor, or one of the various financial charities which offer free advice and help, such as the Citizens Advice Bureau, or Credit Action.

Of course, the best solution is to not take on more loans and debt than you are able to manage, not only over a short term, but also for a number of years. Although this is little comfort to someone who is already in a difficult financial situation, for whatever reason, once they have resolved their current financial problems, they should learn from their previous experiences and not fall into the same trap again.

Less than five years ago, it was relatively easy for anyone to obtain a home owner loan, or any other kind of secured loan, as property prices were growing and banks and building societies became extremely relaxed about offering loans to individuals, even at 100 per cent plus loan to values and for those individuals with a very poor credit rating.

Of course the credit crunch had the effect of putting a stop to all those easy home owner loans and mortgages overnight and we are all now paying the price for years of irresponsible lending from banks and building societies, as it has become extremely difficult for an individual to obtain the loan they require unless they have a perfect credit rating and only need a low loan to value ratio.

As the home owner loan market starts to slowly recover from the last two years, the financial regulator, the Financial Services Authority (FSA) is concerned that many lenders and loan brokers will return to their old ways and start throwing money at borrowers who are extremely unlikely to be able to ever repay the amount borrowed. As a result of this, the FSA has been conducting a survey into the various sectors of home owner loans, secured loans and mortgages, with a view to imposing additional regulation on the sector, on top of the current tight regulation which already exists.

The initial report from the FSA on the home owner loan market is due to be published at some time during October this year and there is a great deal of speculation amongst loan industry experts that it will bring with it some drastic changes to the entire market place for home owner loans. Whilst these new rules are designed to protect consumers and those looking for a new loan, thereby making the home owner loan market a safer place and less likely to experience the problems we have just recently seen for a second time, a large number of individuals within the home owner loan industry are concerned that any new regulation could actually have a detrimental effect on the market, slow down any signs of financial and economic recovery and actually make it harder for a potential borrower to be accepted for the loan they require.

The Financial Services Authority report and eventual additional regulation is likely to focus on those areas of the home owner loan market which have predominantly caused the majority of the problems for individual borrowers in the recent past. These are likely to include: high loan to value products, self certification loans, buy to let loans, impaired credit or bad credit loans and secured loans which take a second legal charge on a person’s home.

One major area of concern is that the FSA will place a ban on high loan to value products in the new regulation. Although high loan to value lending had become quite ridiculous prior to the credit crunch, with lenders offering loans of up to and beyond 100 per cent loan to value, for example Northern Rock’s Together range of products which offered a maximum loan to value of 125 per cent, these products have now completely disappeared and seem unlikely ever to return to the high street or even be available through specialist loan companies. The worry is that the FSA will impose a limit on loan to value across the whole secured loan market and this could be as low as 75 per cent loan to value, which would cripple the home owner loan market, especially for first time buyers, who often struggle to save even a 5 per cent deposit.

It is also expected that the FSA is likely to impose a complete ban on self certification loans which have proved to be extremely useful for certain individuals such as the self employed and those with complicated or irregular earnings, although it has to be said that these loan products have been subject to abuse in the past from borrowers increasing the amount they actually earn in order to obtain a loan, for example the part time cleaner in the local council offices who claimed to be a civil servant earning above £30,000 per annum!

The home owner loan industry itself has practically banned self certification loans already and whatever regulation is introduced to control it, the bad credit loan market is in a similar situation, as the majority of loan companies have had their fingers burned in the past and now no longer wish to be involved in this area of lending.

Secured loans, or second charge loans are not currently subject to any type of regulation and the FSA is hopefully planning to introduce regulation for this huge area of the loan market, as secured loans have actually caused more people to lose their homes through repossession than due to arrears on their main mortgage or home owner loan and most individuals would welcome some sensible regulation in this area.

Similarly buy to let loans are not currently regulated and whilst regulation in this sector could be beneficial for small time and inexperienced landlords who only dabble in the property market with one or two houses to rent out, it could make life a lot more difficult and complicated for many professional landlords with large property portfolios and buy to let loan facilities already established and in place.

The Council of mortgage Lenders (CML), the trade body representing home owner loan providers across the board, claim that many of the areas of concern for the FSA have already been addressed by lenders themselves, such as self certification loans, high loan to values and bad credit loans and that further regulation on top of what already exists could severely damage the home owner loan market going forward.

Michael Coogan of the CML commented on the FSA report, he said “The FSA faces a number of challenges and potential pitfalls in progressing its reviews too quickly. Perhaps the biggest of all is to resist external pressure to implement measures at a time when the mortgage market has self corrected many of the past problems, but is still not functioning effectively.

We must not forget that the existing mortgage rules have broadly been working well since they were introduced in 2004, enhancing protection while promoting competition and choice for consumers. The current problems stem not from a failure of the mortgage rule book, or from widespread credit problems in a recession, but essentially from past approaches to supervision of the rules and an oversupply of money to lend out. Now the pendulum has swung and the problem is the lack of available mortgage finance. Regulatory intervention on mortgages is unlikely to reverse this trend and may accentuate the problem. As it progresses its mortgage market review, the FSA should continue to have in mind the wider goal of promoting a vibrant and competitive mortgage market as we had before the credit crunch, encompassing different types of lender and catering for a wide range of customers.”

Even if a person is currently in a situation where they are debt free, with no loans or credit card bills outstanding, they have probably owed money at some time in their past, or will require a loan of some kind in the future. For those people who need to borrow money, for whatever reason, there is a wide range of funding options to choose from, all of which have their benefits and pitfalls.

Different types of credit are more suitable for different purposes, for example a credit card or overdraft facility on a current account may be appropriate for short term borrowing for just a few months, whereas for things like house purchase, a mortgage or homeowner loan would be a far more sensible choice. One of the most popular and most versatile methods of borrowing money is through an unsecured loan and in this article we will consider the advantage and disadvantages of borrowing money in this way.

Just because we are focusing on unsecured loans does not necessarily mean that this is the best solution for a particular borrowing need and someone should carefully consider all the possible options (including not borrowing at all) before taking out a loan of any kind.

Personal unsecured loans are probably the most popular way for an individual to borrow relatively low to medium sized sums of money, largely due to their simplicity and the fact that they are usually quick and easy to arrange.

In a large number of cases, the loan application can be submitted either at the applicants local bank, over the telephone, or online via the lenders website and very often the borrower will receive an almost instant decision on whether the loan has been accepted or not, with the funds being transferred direct to the borrower’s bank account on the same day as the application is made. This is possible due to the fact that the lender only has to take into account the applicants personal circumstances, their credit rating and ability to be able to afford and manage the monthly loan repayments.

As the name suggests, an unsecured loan does not require any form of security to protect the lender and therefore no assessment of security or valuation is required as the loan is not tied to a borrower’s house or other property in the same way that a secured loan would be (although we will come back to this point later on).

Unsecured loans are covered under the Consumer Credit Act, which offers extra protection to borrowers and a cooling off period after the loan application has been accepted, during which time the customer is able to change their mind without obligation and cancel the loan in full.

The amount which can be borrowed on an unsecured loan varies between different lenders and also on the applicants personal circumstances, but in most cases they range from a minimum amount of around £1,000 and go up to a maximum of £25,000 (as this is the limit which is covered under the Consumer Credit Act). Once the loan has been granted, the money may be used for any legal purpose, from the purchase of a new car, a holiday or as a debt consolidation loan to repay more expensive credit card and personal loan debts.

Whilst unsecured loans remain extremely popular, due to their flexibility and speed of completion, they also have their disadvantages, as well as plus points.

Because the lender requires no form of security for the loan, to protect themselves in the case of default, this represents a higher risk to the loan company and as a result of this additional risk, an unsecured loan will usually charge a higher rate of interest than, for example, a secured loan and is usually only available for borrowing funds over a relatively short to medium period of time, with the maximum term for an unsecured loan usually being seven years, although in many cases this is often five years.

Due to the relatively high interest rates charged, along with the short term of the loan, this can make the monthly repayments on an unsecured loan quite expensive, compared with longer term secured loans, where the interest rate is lower and the capital repayments are spread out over a much longer period.

The other main factor to take into account with an unsecured loan is that, due to the additional risk to the lender it is harder for a borrower to be accepted for the loan they require, particularly if they have anything less than a perfectly clean credit history and any applicant who may, for example, have a County Court Judgement (CCJ) against them, or has missed payments or arrears on a previous loan, is likely to be rejected for the loan, or at least have to pay a much higher interest rate on the loan in order to compensate for the increased risk to the lender.

As we have already mentioned, the maximum sum which may be borrowed via an unsecured loan is £25,000 and therefore if someone wishes to take out a loan in excess of this amount, then they will have to consider a secured loan, or a homeowner loan.

It would be reasonable to expect that the interest rate charged on an unsecured loan would increase in line with the amount borrowed. In fact the reverse is actually the case. A small loan of £5,000 for example, will probably charge a much higher interest rate than one for £20,000. In some cases, this can be a few additional percentage points on the chargeable rate and it can sometimes be in a borrower’s interest to actually take a larger loan than they require in order to obtain a cheaper loan rate, although they should be careful not to borrow more than they need just for the sake of a slightly cheaper interest rate.

We have also previously mentioned that, by its very nature, an unsecured loan will not take a charge over a borrower’s home or other property and this is the case. However, if a borrower falls into arrears, or defaults on their unsecured loan repayments, it is possible for the lender to apply to the courts for a charging order. If this is granted, the lender is able to take a legal charge over the borrower’s property (in just the same way as a secured loan would do) and can therefore recoup the outstanding balance of the unsecured loan, plus any unpaid interest and penalty charges, from the borrower’s home through repossession of the property if necessary, although this approach should only be adopted by the lender as a last resort.

In recent months, with the credit crunch and recession causing many borrowers to fall into an arrears situation with their loan, lenders are starting to use charging orders on a far more regular basis as a means of getting their money back from loan customers in default.

In this article, we have attempted to outline the main points to consider when applying for an unsecured loan, looking at the good, the bad and the downright ugly factors which need to be taken into account before making an application.

For anyone who may be thinking about an unsecured loan, it is well worth shopping around, as interest rates can vary greatly between different banks, building societies and loan companies. Better still is to take advice from a professional, independent financial adviser, or loan broker, who will be able to advise you not only on the best kind of loan to meet your specific personal requirements, but also on the best lender to provide the loan itself and although such an adviser may charge a fee, or take commission from the lender for their services, this can still save the borrower a lot of time and even money in obtaining the most appropriate cheap loan to meet their needs.

Many stay on to do A levels, or equivalent courses and a growing percentage of these students go on to University, partly to further their education, but in many cases simply because there is a distinct lack of jobs available to them otherwise. At this time of year, a large number of young people are busy applying for their student loans to cover some of the costs they will incur whilst at University, along with an assessment of their parents income to check to see if they qualify for the full amount of the loan, or other additional benefits and grants.

Whilst students are busily applying for loans to see them through college, the vast majority of them never stop to consider what they intend to do once they have completed their degree and how they will cope with their finances and loan debts once they have to start and work for a living.

At this time of year there are large celebrations as those students who have been studying for the past three years, or more in some cases, finally don their rented gowns and receive their degree at their graduation ceremony. But once the hangover from the champagne has worn off and they have taken a well deserved holiday, these graduates have to start thinking about getting a job with a decent amount of pay and start to manage their finances and outstanding student loans as well as other credit card, overdraft and loan debts.

It is thought that the typical student graduating from University is likely to have in excess of £20,000 worth of debts, mostly on student loans, but also on credit cards, overdraft facilities and personal loans. Despite the fact that student loans offer an extremely cheap loan option, with no repayments becoming due until the student starts to earn at least £15,000 and even then with interest rates in the region of around just 2 per cent, they are still a debt which needs to be repaid and will have an impact on the individual’s credit rating and ability to obtain a further loan of any kind.

Once a student completes their degree course and leaves University, this is unlikely to be the end of their financial needs and expenses. In many cases, graduates will have to carry on further education or specialist training for a particular job they want, or need to buy a new car in order to be able to travel to work, for example. Bearing in mind that they have no immediate income and in many cases large student loan debts, the majority of graduates are likely to need additional funding to help them get established in their eventual career and this is where graduate loans come in to effect.

A graduate loan differs from a student loan in two main respects. Firstly, they are generally more expensive than a student loan and secondly, the borrower will have to start making loan repayments as soon as the loan has commenced. In other respects, a graduate loan works pretty much in the same way as an ordinary personal unsecured loan, apart from the fact that the interest rates charged are usually less than those on a normal personal loan, although this can depend on an individual’s personal credit rating and if a graduate has a poor financial history, with arrears and possibly County Court Judgements (CCJ’s) the rates charged on any new loan will almost certainly be much higher than for someone with a clean record.

The majority of high street banks will offer attractive deals to graduates, with regards to personal current accounts and rates on graduate loans in order to attract new customers. In the vast majority of cases, the bank which a person chooses as a student is often the bank they will remain with to manage their finances for the rest of their lives, which makes banks and lenders keen to offer the best deals to graduates and students and is also the reason why graduates should shop around extremely carefully for the best deal to suit their particular needs.

As an example of the differences between different banks, the interest free overdraft facility on a graduate current account can vary form just £1,000 up to £3,000 and the interest rate charged on a graduate loan can vary from 9.9 per cent, all the way up to 19.9 per cent APR (Annual Percentage Rate).

Once a graduate starts work and begins to earn money on a regular basis, it is important that they make sure they clear their outstanding debts as quickly as possible. Priority should be given to those debts which charge the highest rate of interest and in most cases these should be cleared first. This is most likely to be credit card debts (apart from zero per cent interest deals) first, followed by interest charging overdrafts and then personal loans.

Graduate loans and student loans are usually fairly cheap loans, but these still need to be cleared quickly, as they can have an impact on a person’s potential for future borrowing, particularly when it comes to wanting to buy their first house and apply for a homeowner loan or mortgage, as the annual amount of any loan repayments are deducted from the applicant’s salary before any income multiplier is calculated by the lender.

For many graduates who need additional funding once they have finished their education, it could well be the first time they have applied for anything other than a student loan and may therefore be unaware of what to look for in order to obtain the best deal to suit themselves on a graduate loan.

The first thing to consider is how much you actually need to borrow. There is no point borrowing more than is needed just because the lender has approved this amount, although often the interest rate charged (APR) will reduce on larger loan amounts, which could be useful for consolidating other existing debts which charge a higher rate of interest, such as credit cards and overdrafts. Compare interest rates between different lenders, don’t just assume that they will all charge the same rate for the same kind of loan.

Be aware of any fees or charges which may be applied to the loan, if you think you may be in a position to overpay on the monthly repayment amount, or repay the whole of the loan early, check to see if there are any penalties for doing this. Sometimes it can work out cheaper to take out a loan with a higher interest rate but no early repayment penalties, particularly if the loan is to be paid off in the first year or two.

There are various types of protection policy which can be taken out to cover either the loan repayments, or the full balance of the loan, should anything happen to the borrower. The lender is likely to offer their own product to cover this eventuality, but they are required by law to wait until 14 days after the loan has been granted, during which time it makes sense to look at what cover other providers offer. There is absolutely no obligation to go with the company which provided the loan and you could well save yourself a lot of money on loan insurance by shopping around for cover.

Finally, it is important to remember that banks and building societies are looking to get graduates as new customers and therefore will all offer incentives to try and attract their business, as they see these individual’s as long term, high potential customers for future business. Therefore you should not rush to the first bank you see, grateful for the fact that they will take you on, but shop around all the banks to ensure you get the best deal for yourself, not only on a new current account, but also on a graduate loan and other benefits which the bank may be prepared to offer.

Remember, banks need you more than you need them!

Many people who were previously unconcerned about their financial situation and were quite happily managing their personal loans, credit cards and mortgage or homeowner loan, along with all their other regular household bills, have suddenly found that due to circumstances beyond their control, possibly through a reduction in their regular household income due to job loss or a pay cut or due to a lack of available funding through a new debt consolidation loan, they are now struggling to keep up with their various loan repayments.

Although there are now the first signs starting to show through, that the UK economy may be on the mend, albeit slowly, for many people the damage has already been done and many borrowers are now facing problems with loan arrears and possibly worse.

Even for those people who have managed to keep their heads above water throughout the current economic crisis, the events of the past couple of years has brought home to them the fragility of their financial situation and many have realised that they cannot simply rely on their large monthly salary to always be there to cover their loan repayments and other monthly bills. This has provided a wake up call for many individuals who have taken the decision to review their finances on a regular basis and clear their outstanding personal loans and credit card debts, thereby freeing up extra monthly disposable income, which in turn may be used to build up some level of savings as an emergency fund, or financial safety net.

For anybody who is serious about actually clearing their outstanding personal loans and credit card balances, where to start can sometimes be a daunting prospect, depending on just how many different creditors there are to deal with.

As a starting point, it is always a good idea to put together an income versus expenditure plan. This should list all your income including salary, any secondary income and any benefits for which you may be eligible. If you have a joint household income, you should sit down together and carry out this exercise on a joint basis. Once your income is listed, then set about listing all your monthly expenditure. For utility bills which may be paid on a quarterly basis, work out the monthly equivalent and use this figure. It is vitally important to list all your outgoings, not just your loans and card payments, so include utility bills, food and travelling expenses along with the cost of regular leisure activities.

If done in enough detail, this should provide an accurate figure of just how much disposable income there is left at the end of each month, some of which may be redirected to repay loans and cards. This exercise is also useful as it may highlight certain areas where savings could be made instantly. Writing things down in an organised fashion will make the situation look a lot clearer than simply sitting looking at a large pile of paperwork from various organisations wanting money from you!

Once you have ascertained your disposable income, make a list of all your various credit agreements, including your mortgage, secured loans, unsecured loans, credit cards, store cards and overdrafts. For each of these write down the outstanding balance, remaining term (if applicable), monthly repayment amount and the interest rate being charged. Once again things will seem a whole lot clearer once they are written down.

Usually it makes sense to focus on those debts which are charging the highest rate of interest first, as this will save you the most money in the long term. This is most likely to be overdrafts and credit and store cards, although some credit cards offer zero per cent, particularly on balance transfers, for a limited period, so look carefully at these rates. Once credit cards have been cleared, usually the next most expensive form of credit is likely to be unsecured loans, then secured loans and finally, mortgage or homeowner loans.

Most of these types of loan will allow the borrower to make regular overpayments, but beware of early repayment penalties, particularly in the early years of a loan, as these could cancel out the benefits of overpaying. In this situation it could be more cost effective to make overpayments on a cheaper loan, rather than waste cash on repayment penalties. Any charges and penalties will be listed in the original loan agreement, which should state how much they are and how long into the term of the loan they will apply.

Although in the majority of cases, repaying the most expensive debts first is the best course of action, sometimes it could be beneficial to clear an outstanding small loan or card balance, even if this at a cheaper interest rate than some other commitments. If a loan or credit card has a reasonably small balance outstanding, it will be easier to clear fairly quickly. This will have the effect of removing one of your monthly commitments from the equation altogether and will also free up some more disposable income to redirect to other areas. This could be a particularly useful exercise for somebody who may be close to their financial limit on their income/expenditure budget, who needs to reduce monthly outgoings as quickly as possible.

Another popular option for someone with a number of credit agreements is to apply for a debt consolidation loan. This has the benefit of rolling up all a person’s various debts into one regular monthly payment, usually at a lower interest rate than they were previously paying and very often at a much lower monthly repayment amount.

There can be drawbacks with this route however. Firstly ensure that the interest rate on the debt consolidation loan is lower than those being charged on your existing debts, otherwise there is not a lot of point in taking this course of action. Secondly, if the term of the new loan extends beyond the repayment dates of the original debts, interest will be charged for longer and the loan could cost you more over the term, even if the monthly repayments are significantly less than your combined previous debts. Thirdly, it is important to repay outstanding debts with the new loan and then do not re-use your credit cards. Many people fall into this trap and end up with double the amount of debt than they started with. With a debt consolidation loan, you have not cleared your debts, you have only moved them all to another place!

If you are having difficulty in organising your debt repayment plan yourself, there are plenty of places which can offer assistance. There are various charitable organisations such as the Citizen’s Advice Bureau (CAB) who offer free debt advice. Independent Financial Advisers can also provide assistance, although they are more likely to charge a fee for their professional services. Even the local branch of your bank can help, although advice is often limited to their own products and services.

Finally, the most important thing to do once you have made a debt repayment plan , is to write it down, refer to it on a regular basis…..and STICK TO IT! Clearing debts can take a long time and a lot of perseverance and it will not happen overnight, but by remaining focused on your goals, you will end up debt free sooner than you may think. Good luck!

A large number of individuals do not bother checking their credit rating before they apply for a new loan and very often they will sit there and wait with their fingers crossed once they have completed the application, whether this is in their local bank or via an online application system, whilst a credit check is carried out to ascertain whether or not they will be granted the loan they want. Usually this process only takes a few seconds, but whilst you are waiting it can seem like hours (if you’ve been there, you know what I mean!)

If the applicant is accepted for the loan or other credit agreement they applied for, then all well and good and little more thought is ever given to the process, but in the situation where the application is rejected, or offered at a reduced loan amount or higher interest rate, then it can be of great concern and can cause problems for the person who applied for the loan.

Most individuals are unsure of just how their credit rating works and the process which lenders use to assess a person’s ability to repay a loan, their credit rating is their credit rating and nothing can be done about the situation to change the facts which stop them getting a loan. But with a little understanding of how lenders check loan applicants and a little care and management of their credit file, it is possible for an individual to improve their rating in order to be accepted for a loan or card in the future. 

There are several factors which a bank or building society will use to assess whether or not a person is acceptable for a loan, credit card or homeowner loan and although most of them will use the same information, many lenders will use it differently from others, with one lender placing more emphasis on one area than another, for example. The main areas for them to consider are, firstly basic information such as employment status, job security, homeowner status and income and affordability information. Other loans and credit agreements will also be taken into account, both on how much has been borrowed, what the monthly repayments are and also how the account has been handled, i.e. whether there have been any missed or late payments, or if the account is in arrears.

The lender will also then look at the applicant’s credit file. This can be through one of the three major credit rating companies; Experian, Equifax and Callcredit, each of whom keep an up to date record of a persons financial details, usually over a six year history, although in some cases this can go back further than this.

A person’s credit file contains details of their name, address history over a six year period, other people living at that address (although this information will not affect a person’s individual rating) and details of any existing loans, credit cards, homeowner loans or other credit agreements, along with a payment history of these credit items, showing if an account is up to date, in arrears or default, or has had any missed payments. If a person has had any County Court Judgements (CCJ’s), bankruptcies or Individual Voluntary Arrangements (IVA’s), these will also show up on the credit file.

Every time someone applies for any type of credit (including things such as mobile phones on a monthly contract basis) a credit score is carried out by the provider and this process leaves a “footprint” on that person’s credit file, which can affect their overall rating and therefore ability to be accepted for a new loan. if a new lender sees several credit checks for loan applications made by different companies over a short period of time, whether or not these have been accepted, rejected or not been taken up by the borrower, this can set alarm bells ringing for the new potential lender and have an adverse effect on the likelihood of that person being accepted for a loan.

As we have already said, different lenders use an individual’s information in different ways and also use different credit reference agencies, which can affect the outcome of the credit scoring process. So just because a person has been rejected for a loan with one company, does not necessarily mean that they will also be rejected by a different lender. Although the information held by credit reference agencies should be accurate and up to date, in many cases this is not the case and it is a worthwhile exercise to obtain a copy of your credit file from each of the main companies before applying for a new loan.

These can be obtained, for a fee of £2, by writing to each of the companies, or by applying online. If your information is inaccurate, or in some cases completely wrong, this can be updates and amended, although you may have to provide evidence to show that your record has been cleared and this can then take up to a month to show up on your credit file.

So if someone has been rejected by the lender for a new loan or a credit card, what can they do to improve their rating and stand a better chance of being accepted in the future? Firstly, as we have said, they should obtain a copy of their credit file and check the information is correct. If there are any genuine arrears, defaults or County Court Judgements outstanding, these should be cleared up as soon as possible and a certificate of satisfaction obtained from the company in question.

It is also vitally important to keep a good track record of repayments on existing credit, so ensure that all loans repayments and credit card bills are paid on time and kept up to date. Even if you’ve had a terrible payment record in the past, for whatever reason, three to six months of consistent and up to date repayments can make a huge difference to your overall credit score. Just as someone with too many loans or credit agreements can be rejected for a new loan, someone with no previous credit at all may also be rejected, simply due to the fact that they have no track record for a new lender to assess them on and although it may sound ridiculous, sometimes the best thing to do is apply for a small loan or credit card elsewhere, just in order to be able to show a record of repayments.

Finally, the most important thing for anyone to do, whether they are thinking about taking out a new loan or not, is to maintain their credit rating at as high a level as they possibly can. Keep up to date with all repayments and repay existing debts as quickly as possible, do not just make the minimum payment on your credit card each month, clear as much of it as possible. Also continue to check your credit file with all three credit reference agencies every few months to make sure the information held on you is up to date and accurate.

By following these simple guidelines and only applying for credit when you actually need it, you credit rating may improve significantly and continue to do so the longer a good track record is maintained.

Each alternative has its advantages as well as its disadvantages and it can be quite a minefield for someone who may be looking for a new loan to have to wade through all the various options. In the majority of cases it can be beneficial to seek professional advice from an independent financial adviser (IFA) or a loan broker, who will be able to help you get the right type of funding for what you require. In this article we are only going to look at one particular option for a loan, that is a secured loan.

As the name suggests, a secured loan is one which takes some form of security for the loan, which may be called on in the situation where the lender has to call in the loan if the borrower should default on his or her repayments. This would be done by repossessing the property in question, which would then be sold on by the lender in order to get their money back. Therefore, when we talk about a secured loan, the security is there for the benefit of the lending organisation, not the person who is applying for the loan. In the majority of cases, the security to be used is the borrower’s home, but it could actually be any asset owned by the applicant, such as an investment, a second house, a car, or even a work of art, for example

As we have already said, in the majority of cases, a secured loan uses the borrower’s main home as the security for the loan. Most individuals who apply for a secured loan already have an outstanding mortgage, or homeowner loan on their property. A secured loan takes advantage of the equity which is held in the property, that is the difference between the value of the house and the balance on the existing loan.

In most cases, the maximum loan to value ratio which is allowed across all loans is around 80 or 85 per cent, but there are some lenders who will allow more than this (very few in the current economic conditions), whilst other lenders may limit the maximum loan to value as low as 65 or 75 per cent. As the loan to value ratio increases, so does the level of risk for the lender and therefore usually the interest rate charged will be higher, along with the lending criteria being tougher.

The main mortgage or homeowner loan on the property takes what is known as a first legal charge on the property, with a subsequent secured loan taking a second charge. In the case of the borrower defaulting on the loans and the property being repossessed, the first charge loan would take priority when it comes to getting paid out, with the second charge loan depending on there being sufficient equity from the sale proceeds. As this poses a higher risk for the secured loan provider, the interest rates on secured loans are invariably higher than those of a typical mortgage.

It is possible to take a secured loan out on a third or even fourth charge basis, depending on the amount of available equity, but these are extremely rare. 

As with any other type of finance, there are advantages and disadvantages with a secured loan. On the positive side, secured loans are generally readily available through a number of routes. Most banks and building societies offer them, as do centrally based loan and finance companies. Loan brokers and intermediaries usually have access to either the whole of the loan market , or a selected range of providers and therefore this can be an advantage when sourcing the best loan.

As the loan takes security out against the borrower’s property, the risk on a secured loan is far less than that on an unsecured loan, making it a relatively cheap option. Likewise, due to the additional security of a secured loan, it is possible to borrow much larger sums of money than it is with alternative funding options and the loan is able to be taken out over a much longer period than the usual four or five years of an unsecured loan, often with terms of anything up to 25 years, thereby significantly reducing the amount of the monthly repayment.

A potential borrower who has a less than perfect credit history will stand a better chance of being accepted for a secured loan, once again due to the increased security for the lender, although they are still likely to have to pay a higher interest rate and be limited to a lower loan to value ratio than someone with a good track record.

On the down side, as the secured loan uses the applicant’s property as security for the loan, the borrower must be a homeowner. A tenant, or somebody living with their family for example will not be eligible for a secured loan and will need to seek alternative funding elsewhere. It is also possible for the borrower to have their property repossessed if they should fall behind with their repayments and default on a secured loan and as a result of this, all secured loan documentation contains the warning “your home is at risk if you do not keep up repayments on your mortgage or other loan secured on it.” Although taking a secured loan out over a long term of years has the advantage of reducing the monthly repayments, overall interest will be paid for a much longer period than with an unsecured loan and therefore the total cost will be much higher.

Following the recent credit crunch and the general economic slow down in the UK, there has been a significant reluctance on the part of lenders to offer loans of any kind to borrowers, however good their credit history may be. As secured loans depend on the value of the borrower’s home and with property prices falling in the UK over the past couple of years, many lenders have either withdrawn their loan products from the market place altogether, or severely restricted the maximum loan to value ratio they will allow in order to avoid borrowers entering a negative equity situation.

But as property prices are slowly starting to show some signs of growth over the past couple of months, hopefully this will feed through to the secured loan market and we will see some new, more competitive products appearing from lenders.

Finally, the advice for anybody who may be considering taking out a loan of any kind is to think carefully before you borrow. It can be expensive and take a long time to repay any money which has been borrowed, therefore only borrow the minimum amount you require and don’t be persuaded to go for the maximum amount which you may be eligible for.

Also, unless you are extremely confident and knowledgeable about the loan product you are looking for, it can save a lot of time and, in the long term also a lot of money, to take advice from a professional adviser such as an IFA or loan broker, who is able to offer advice on the best options for your particular needs as well as source the cheapest loan from the whole of the loan market.

The banking sector is currently in turmoil, as years of greed and irresponsible lending policies have finally taken their toll on the sector, with banks making record losses, being taken over by competitors and receiving billions of pounds worth of government bail outs to help write off bad credit loans.

Due to a lack of liquidity, it has become extremely difficult for an individual to obtain funding through a personal loan or homeowner loan, unless they have a perfect credit rating and even if they are accepted for a loan, despite interest rates being at a record low level, the cost of personal finance seems to have increased dramatically, making a cheap loan seem like a thing of the past.

At the same time as this, interest rates for savers and investors have plummeted and many savers are concerned about just how safe and secure their savings actually are in the bank or building society. It seems hardly surprising therefore, that many people have lost faith in banks, both as savers and borrowers and are now looking for an alternative home for their money, or provider for their next personal loan.

But what are the alternatives to the traditional bank or building society route, for someone who has become disillusioned with the system, or is unable to obtain the loan they require?

Credit Unions

One alternative solution for both savers and those looking for a personal loan is a credit union. Credit unions have been around for many years and operate on the principle of a financial co-operative society, existing for the benefit of members and have been growing in popularity over recent years and particularly since the start of the latest banking crisis.

A credit union is owned solely by its members and run by the same people, all of whom must have something in common with each other, such as all working for the same company, living in the same local area, or being members of another group or organisation. The individual members of the credit union invest their own money in the central fund, along with all the other members, which can then be used to offer cheap loans to other members of the union and offer a better return on an individual’s savings than they would ordinarily receive from a typical bank or building society deposit account. This would be paid to the member in the form of a regular dividend, rather than monthly interest.

For someone looking for a small personal loan, a credit union offers a cheap and flexible alternative to their normal bank. One of the rules of a credit union is that the maximum level of interest which can be charged on a loan to a member is capped at 2 per cent per month, but in many cases the actual rate which is charged is much less than this. Repayments are extremely flexible and a borrower is able to take out a loan for just a few months if they so wish and repay all or part of the outstanding balance at any time without incurring penalties.

The important thing to remember about this type of organisation is that, in order to benefit from it, you have to be a member and the credit union is run solely for the benefit of its members, therefore any profits made are returned to those same members in the form of dividends and lower interest rates on loans, unlike banks which are more interested in generating huge profits for their shareholders, at the cost of the ordinary customers. 

With regards to saving through a credit union, this too is extremely flexible. It is possible to deposit a lump sum, or make regular savings amount either by direct debit or directly from salary (particularly in the case of credit unions which are run through employers). The money invested is accessible at any time and it is possible to deposit, or withdraw cash as often as you like. Under current legislation, there is no interest payable on savings within a credit union, but a dividend is paid on a yearly basis, based on the interest charged on the loans made by the union.

Clearly the amount of dividend can vary, depending on term and amount invested, but typically it is the region of between 2 and three per cent, but could realistically be as high as 8 per cent. As from May this year, however, credit unions will have the option of paying interest to their members rather than a dividend.

Whether an individual joins a credit union as a saver or a borrower, they are offered a high level of protection automatically through the organisation. For someone taking out a personal loan, the credit union automatically provides free life insurance to the borrower to cover the outstanding balance of the loan. For savers, it is reassuring to know that all credit unions are covered under the Financial Services Compensation Scheme, which means that a person’s money is protected even if the credit union were to close down.

Credit unions have been around for many years and up until recently have often been thought of as out of date. But due to the recent problems in the banking sector they are starting to grow in popularity once more and the government is now becoming involved, with plans to alter the legislation which regulates credit unions, in order to bring them more up to date and make them more appealing and accessible to a wider range of individuals.

One spokesman for the government said “The excellent service provided by Co-operatives and credit unions take place within an outdated legislative framework and overhauling this will be key to achieving a significant expansion of the sector. I want the sector to thrive and grow further, to be widely seen as a genuine alternative to proprietary companies across the country, not stereotyped as “old fashioned” or confined to its Northern roots. This is a vision of credit unions as the modern day equivalent of 18th century “town banks” providing a local, trusted alternative to the national banks on every high street. To achieve this vision means removing barriers to co-operatives competing fairly in the market place and enabling them to bring a greater range of services to a wider range of people.”

Hopefully, new legislation will bring renewed activity and interest in credit unions and not restrict them by imposing too many prescriptive rulings on their activities. Either way, interest continues to grow in these organisations, both for savings and personal loans and it looks as though they will be here to stay for some time, providing a realistic alternative to the traditional bank.

For more information on credit unions, or to find one in your local area, contact the Association of British Credit Unions Ltd.