Pitfalls of Applying for a Cheap Unsecured Loan: Be Aware of Headline Interest Rate, PPI, and Personal Credit Score

An unsecured loan, sometimes called a personal loan, is offered without security, unlike a secured loan where a person’s assets, usually their house, are used as security against the loan.

Interest Rates

Lending organisations have slick marketing people working for them whose purpose in life is to try to tempt the unwary customers with appealing headline rates of interest. It is essential therefore that anyone applying for a loan based on a headline rate thoroughly investigates all the costs involved, many of them not immediately apparent, before signing on the dotted line.

Credit Rating

Before applying for the loan, there are a number of steps worth taking. The best deals, the ones that offer the lowest rates of interest, only go to borrowers with the best credit ratings because the only security that can be offered with a personal loan is the borrower’s track record of making previous loan repayments. In essence the lender is asking the simple question: “How likely is it that I will get paid on time.”

Credit Score

There are three major credit reference agencies in the UK — Equifax, Experian and Callcredit — and it’s possible to get a free credit score report from them. Check it over thoroughly and make sure it is accurate. If it’s not, take the necessary steps to rectify it, so be aware of what affects a credit score. There is lots of support and advice available to do this.

Unsecured Loan

It’s especially important to decide how much to borrow and over what period. Don’t be tempted, or persuaded, to take more than is needed, to be paid back over a longer period. Remember the longer the repayment period the more the interest charged.

If for example £10,000 at 7% is borrowed over three years the interest charged is £1,100; over 10 years interest would be more than three times higher at £3,900.

Payment Protection Insurance

Payment Protection Insurance (PPI) will almost certainly be offered with an unsecured loan and is a hugely controversial part of the loan process, which will increase the level of repayment.

The UK Financial Services Authority (FSA) says PPI is an: “Insurance that will pay out a sum of money to help you cover your monthly payments on mortgages, loans, store and credit cards, if you are unable to work…”

There are a number of things to be aware of when considering PPI:

  • A borrower does not have to take PPI at all. (Be careful with this option)
  • A borrower does not have to take PPI from the lender.
  • A borrower may find less expensive PPI from an independent insurance broker

Many unsecured personal loans are applied for when a person’s in a dire financial situation and it’s perhaps human nature to go for, what seems on the surface, the best deal. However by stopping to draw breath and researching all possible options, considerable sums of money can be saved.