Personal Loans, What APR Can I Expect?
The Consumer Credit Act 1985 laid down the basic ground rules for how all forms of personal credit should be advertised, negotiated, documented, administered and settled. One of the key aspects of the legislation was that it introduced a standardised way for the true cost of credit to be compared. The Annual Percentage Rate (APR) is the rate charged for the total cost of all credit and includes any fees and known penalties. Therefore, it became possible, for the first time, for consumers to be able to directly compare the rates charged by lenders for varying products.
All lenders now have to state a typical APR when they advertise and an actual APR (accurate within stated tolerance levels) when the loan is concluded. This makes the APR one of the effective ways of comparing different offerings from lenders in terms of the rate charged, but not necessarily the total amount to be repaid. That will depend upon the term of the loan in addition to the rate.
Personal loans tend to come in two forms – secured and unsecured.
Secured loans, as the name suggests, relies on some form of pledged asset as contingent collateral in the event that you fail to make the payments as agreed. The most common secured loan is a mortgage where the lender takes a charge over the property being bought with the loan. Should you stop making payments, ultimately the lender can exercise their option to call in the security and sell your home to repay the loan balance. However, other forms of security can also be pledged (though less commonly) including share certificates, pension funds, jewellery or fine art. The lender will assess a default value to these assets and will look to make sure that the security value exceeds the loan value by a comfortable margin.
Since secured loans afford the lender better protection against loss, the rate charged (as evidenced by the APR) will be considerably lower than for an unsecured loan. Whilst security value is one factor affecting the rate, your credit history will also be a variable and the better it is, the lower the rate. If you have a high loan to security value and a poor credit history, you may still experience a relatively high APR – but at least you will get a loan!
Unsecured loans are just that. Loans advanced against the promise that you will repay but with no collateral. There may be guarantors or co-obligors requested – but this is credit enhancement and not security. It simply seeks to make the likelihood of repayment higher since there are guarantors to pursue in the event of default as well as the borrower.
Since the risk of losing money is higher, the lender will charge a higher cost for credit. The APR may be 3-5% higher than a secured product – but they are hard to compare directly since the secured loans are for larger amounts over longer periods and the unsecured loan will be for smaller amounts over shorter periods. Since there are additional costs incurred in setting up a secured loan (property searches and valuations for example), it only becomes cost effective for larger loan amounts and longer repayment periods.
It can be possible to borrow up to £25,000 on an unsecured basis – but the usual cap is around £15,000. Loan rates currently range from an APR of 15% (for smaller amounts around £1,000 - £2,000) to 8% for amounts in excess of £7,500. Secured loans up to £25,000 can be found for around 5.5% currently.
When looking for a loan make sure that it fits your needs. If you think that you may repay the loan early or want to have some flexibility in the repayments then make sure to shop around. The APR is a good guide but make sure that the loan terms match what you believe your needs to be.
Credit and store cards use differing assumptions with which to work out their APR rates. Make sure that you look at how they assume you will repay your debt and make sure that you agree with their assumptions. If you are unsure then ask them to provide you with a specific quotation on the basis of your expected usage.
The APR stated on the loan agreement must be the rate charged on the loan. If you default on the payments or believe that the rate is incorrect then you can have it checked. An incorrect APR can render the loan agreement void so it is worth checking in the first instance. This will not be something that you can usually do at home, but free assistance is available from organisations such as the Citizens Advice Bureau. They can also provide free and impartial advice on wider debt management and loan issues.