If you're considering applying for a long term loan then it's essential that you understand the small print. But to be able to do this means being familiar with the lingo that's used, and that can be quite challenging if you've not had finance before.
There's a competitive market for long term personal loans and if you want to pick the best deal, you'll need to be able to pick out the factors which are important and compare them accurately. You won't be able to do this if you know don't your APR from your PPI. Below you'll find a quick run through of some of the most common types of financial jargon and what it actually means.
APR and acceptance rates
When you are looking at the various providers, probably one of the first areas you'll head to is the long term loan calculator. This will tell you how much the loan repayments will be each month but they won't give you any indication of the level of charges you'll be paying. If you're comparing identical loans it's not so difficult to tell which one offers the better deal. However, if you're looking at loans over different terms or for different amounts, you'll need more than just the calculator to work out which is more competitive.
The APR - Annual Percentage Rate - shows how much you'll be paying, expressed as a percentage, over a 12 month period once all fees, interest and charges have been added on. Companies must legally show the APR on their loans so customers can make a fair comparison between products. If you find a low APR, then it's a cheap long term loan.
Acceptance rates tie together with the APR. The APR which is advertised by the lender may not be the rate that you end up being charged. If you're considered to be higher risk or you don't have such a good credit rating, you could be charged more than the APR on the marketing material. However, to stop misleading APRs being advertised, at least 66% of approved applicants must be offered this rate. The overall acceptance rate is the number of customers who get their application approved, regardless of the APR charged.
If you've had financial problems in the past you might not be accepted for a cash loan long term by every lender. However, depending on the severity of your debts and the stability of your current finances, you may still be able to get a loan if you go to a specialist lender. These might be described as a long term bad credit loan, but they may also be advertised as loans for adverse credit.
Take a look at our guide to getting a long term loan with a bad credit rating for more information on this subject.
You may find some lenders advertise loans which are available to those with CCJs, also known as County Court Judgements. A CCJ is issued by the County Court if an individual doesn't repay a debt of some kind. Once a CCJ has been issued, it can be enforced by bailiffs. A CCJ will impact an individual's credit rating negatively making it more difficult to borrow money.
There's lots of reasons why you might want a long term loan, possibly for a large purchase such as a car, to pay for a wedding or carry out home renovations.
However, another popular reason is for debt consolidation. This means using the money to pay off lots of smaller debts to consolidate them into one single loan. The advantage of doing this is that it's not just easier to manage but typically works out cheaper too.
Early Redemption Charge
If you decide to pay off your loan early, your lender will have to calculate exactly how much you have left to settle. In some cases, an early redemption charge (also known as an early repayment charge) may be added. This is a penalty that the lender adds to your balance but must be clearly included in the terms and conditions provided to you when the loan was agreed.
Payment Protection Insurance (PPI)
Payment Protection Insurance (PPI) isn't compulsory but can be added to loans to protect you against ill health, accidents or redundancy.
There has been much controversy surrounding the sale of PPI in the past as it's not suitable for everyone and can be an expensive form of protection. The Financial Ombudsman Service have dealt with a large number of complaints about PPI and have provided information about this on their website at http://www.financial-ombudsman.org.uk/ppi/what-is-ppi.html. However, PPI may still be useful in some circumstances, particularly if the borrower doesn't already have insurance to cover ill health or redundancy.
A long term personal loan is a regulated product; this is in contrast to products such as a merchant cash advance which is unregulated.
Regulated products and their providers are monitored by the Financial Conduct Authority and/or the Prudential Regulation Authority. This means that the firms must adhere to a Code of Conduct and ensure their products meet the criteria set out by the regulator. In the event of any complaints which cannot be settled directly with the lender, the individual can refer to the Financial Ombudsman Service for free mediation and advice.
Secured and unsecured loans
If you need a long term loan you have two options: secured or unsecured.
Unsecured long term loans are easier to obtain if you have a good credit rating as you don't have to offer any collateral in return for the cash. However there is a limit to the amount of cash you can borrow; £25,000 is the limit for unsecured loans.
In contrast, a secured loan is a type of borrowing where the finance is levied against something of value, such as a house or a car. This means if you default on your debt the lender can repossess the item you offered as security. Long term secured loans are easier to obtain than other types of unsecured finance if you have a poor credit rating.
Read the small print
Everyone knows the importance of reading through the small print before signing on the dotted line, and this guide should help you understand some of the key terms you might see. There's lots to consider when deciding whether a long term loan is right for you, and you should never rush the decision. Using the above information, compare the different lenders on the market before choosing the one that's right for you.
Have a look at our article on How to get a long term loan with a bad credit rating if your credit rating is holding you back getting a loan.