Introduction to Personal Loans
Perhaps you haven't been in the house long, or house prices have not risen since you bought your house. If there is no 'new equity' in the house since you originally took out the mortgage, you are going to have to look elsewhere.
The next best deal you are likely to get is a personal loan.
Personal loans are made to people with good credit records. Because they are not secured on the borrower's house, the lender will charge a higher rate of interest than they would charge on a mortgage loan. The lenders are relying on their judgement of your credit worthiness to get their money back. They will therefore carry out detailed checks with credit agencies, on your credit card record and on your current bank account. If there are problems you may not get a loan.
The high street banks are big lenders of this type and if you go to your own bank for a loan to buy a car or for a new kitchen or bathroom, this is the type of loan you are most likely to be offered. The interest rate (APR) may be at double and in some cases as much as four times what you would expect to pay for a mortgage. (So if you can raise the money through increasing your mortgage, you'll be a lot better off doing that rather than taking a personal loan.)
The loan will usually be offered for a minimum of two years and there will not be an option to repay earlier (except possibly with a big penalty). Banks prefer to lend to you for as long as possible - five or even ten years. The repayments are often front end loaded so that you will pay a higher rate of interest for the first two years than for the last three years of a five-year loan. The lender is encouraging you to keep the loan over the longer period. You will probably be offered a lower rate of interest if you agree to a longer loan period - but this will prove more expensive in the long run than a short term loan.
The temptation is to accept whatever your own bank offers you. If they don't like the way you've run your account with them over the years (the occasional unauthorised overdraft perhaps), they may charge you more than their minimum rate. It is vital to shop around. There are very big differences in what different- lenders will offer to the same borrower. There are also big differences in what one lender will offer to borrowers with varying credit records. If you borrow £8,000 over five years at an APR of 7.8%, you will pay £1,250 less in interest than if your lender charges you 13.8%. A few phone calls may find a lender who is prepared to charge you less because they think they can sell you other services. And they may not find out about that unauthorised overdraft you once had and which your own bank knows all about.
Don't forget your other financial commitments though. Could you still pay your mortgage, your credit card and this new loan if you had a cut in overtime or bonus during the next three or five years? Repayment protection insurance is usually offered, but the benefits are very limited. It's also very expensive for what is offered. On a £10,000 loan, the repayment protection policy is likely to cost £300 per year.
