The world of loans and lending money has a jargon all of its own which can make it hard for people who don’t work in the industry to understand exactly what’s been talked about.
Taking out a loan is something you need to consider carefully – it should not be an easy decision. If you’re taking out a short-term loan or a payday loan, you should only think about using one of them if an emergency has come up and you don’t have enough in your savings account to pay for it. You also need to make sure that you can make repayments on your loan in full and on time.
In this article, BestUnsecuredLoans looks at industry jargon and our experts explain exactly the meaning of each term and how it affects you.
A credit score is a number that credit reference agencies come up with to describe how good you are at:
- repaying loans and credit cards, and
- keeping up with your household bill payments.
Every time you take out finance or you sign up to a company that provides something for your home (like utility bills, Sky Television, broadband, and so on), they keep the three credit reference agencies up to date with how you’re handling your account.
When you make a payment on the expected date and for the expected amount, that’s recorded on your credit report and that’s good. If you miss a payment, that’s also recorded but it’s bad.
Your credit report contains details like how much debt you’re in, how far away you are from the limits on your credit cards, and whether you have County Court Judgements or you’re in an Individual Voluntary Arrangement.
When a lender is considering whether they’re going to say “yes” or “no” to your application, your credit report and your credit score are an important part of their decision-making process.
A direct lender is a loan company you approach directly for finance.
There are two types of direct lenders:
- those who will only deal with applicants themselves, and
- those who will both deal direct with applicants but also work with customers introduced to them by loan brokers (more on that later)
Direct lenders, whether you approach them yourself or you’re introduced by a credit broker, will only generally offer a loan to an applicant close to the “profile” (more on that later) of the type of customer they like to deal with.
Early repayment penalty
Most unsecured loan companies, including payday loan and short-term loan firms, are fine with you paying their loan back earlier than expected. It’s not always been that way though. As little as 10 years ago, nearly every loan company would “fine” you for settling your loan in full earlier than expected.
What are the benefits to you of working with a loan company which has no early repayment penalty? Let’s say you take out a payday loan for £100. By law, the maximum a payday loan company can charge you in interest rates (more on that later) is 0.8% per day – 80p. So, if you took a payday loan out over 30 days, the most they could charge you in interest is 80p multiplied by 30 days which equals £24.
If you are in a position to pay back the loan over 10 days, you’d only be charged £8 in interest instead of £24 if you paid back on the 30th day.
This is an area that confuses a lot of people. The sums behind working them out can be very difficult to understand and, in the opinions of some, the way that interest rates are displayed makes some loans look more expensive than they actually are and other loans look cheaper than they actually are.
Let’s take a look at “APR”, “representative APR”, and “daily interest”.
APR is short for “annual percentage rate”. This indicates how much interest you will be charged on a loan over the period of a year. APRs are helpful when you’re wanting to take out a loan that you’ll be paying back over a period of 12 months of more.
Some argue that they’re not that helpful with payday loans and short-term loans because the rate of APR seems high but the loans they’re trying to describe would not be lent out over that length of time anyway.
Representative APR is there to give borrowers an idea of the level of APR on the loans provided by a particular company. A lender can display a representative APR if 51% of their borrowers are offered that APR. Of course, that does mean that up to 49% of successful applicants will either pay more or less on their loan than the representative APR.
By law, every loan company and loan broker (more on that later) must display a representative APR on all of their advertising including on their website.
Daily interest is something you’re more likely to see displayed in addition to APR on advertising from payday lenders and short-term lenders. As we mentioned earlier, a payday loan provider may only charge up to 0.8% daily interest on their loans to borrowers.
If a payday loan provider charged 1% interest per day on the money they lent out, the APR would be 5,853%. When that’s reduced to 0.8% interest per day, the APR drops to 1,509%.
How can 0.8% per day turn into 1,509% APR per annum? There is a sound logic behind this but the problem is that it could makeunderstanding how interest works more confusing for potential borrowers.
BestUnsecuredLoan’s advice would be to consider the cost of the loan overall and the repayments you need to make every month when considering if a loan offer is right for you and it’s manageable.
A loan broker is a company which brings together the right type of lender with the right type of borrower. We’re going to be talking about this next but what a broker does is look at the information you provide them with and then they match it to the loan companies most likely to want to work with you.
All loan brokers must be registered with the Financial Conduct Authority and all the loan companies on their lending panel (that’s the term describing the lenders that a broker has a good relationship with) must be Financial Conduct Authority licensed too.
How do loan brokers earn their money? The three most popular ways are:
- they’re paid by a loan company every time they introduce a new customer who then takes out a loan
- they charge the borrower a “broker’s fee”
- a combination of the two
BestUnsecuredLoans is here to save you money. We will never charge you a broker’s fee. We’re only paid when we match up a borrower with a lender and the borrower actually takes out the loan.
Profile (borrower profile)
Next to a credit score, this is the thing that most would-be borrowers worry about the most. Do they fit into a loan company’s criteria for lending? You might have a pretty good credit record but you might worry that a loan company you apply to is looking to lend to someone whose circumstances are different from yours.
Let BestUnsecuredLoans introduce you to the lender’s “profile” or “borrower profile”.
A profile is a set of guidelines a lender has and the more that a borrower fits into those guidelines, the more likely they are to be offered a loan. What’s in a typical profile?
- level of earnings
- percentage of income derived from benefits or tax credits
- level of expenditure every month
- what your address history has been like in the last few years
- the nature of your employment (full time, part time, permanent, temporary, zero hours, etc)
- number of county court judgements or missed payments
- number of recent applications for credit
The more boxes you tick, the better. The problem for many borrowers is that lenders generally don’t publish what their profiles are on their websites. That makes it very hard for a borrower to know if they’re applying to the right lender.
That’s where loan brokers come in. Lenders share their profiles with brokers because they only want their brokers to pass loan requests onto them where there is a good chance that they’ll say “yes”.
So when BestUnsecuredLoans gets your application, we look at the information you’ve provided us with together with your credit record and our smart computer system works out the lenders most likely to want to count you as their newest customers within seconds.
It’s what we do after that which makes us very different from everyone else and, yes, there’s more on that later in this article!
When you take out a loan, you have to agree to a repayment schedule with your lender.
If you take out a payday loan, you pay the loan back in full plus the interest within 30 days or on the day you receive your next wages from your boss.
For short-term loans, you borrow the money for a period of between 2 months and 12 months. Your repayments will be for a fixed amount and you’ll be given a repayment schedule – that tells you when the repayments are due to be taken from your bank account.
Your repayments are collected using something called a Continuous Payment Authority. A CPA gives your lender permission to take money out of your bank account using a debit card. You have a legal right to cancel a CPA (although you should speak to your lender before you do that because they can help you if you’re suffering financial difficulties) and a loan provider can only make two attempts to collect a payment using a CPA.
Many types of loan products require you to put down “security” or “collateral” before they say “yes” to your loan application. Security is something of value that the lender can take from you in the event that you can’t repay your loan. Your lender will then try to sell your security to pay off the remainder of the loan. If they can’t sell it for the value that you owe, you will have to pay your lender back the remainder of the balance in many cases.
Mortgages use our home as a security, logbook loan companies our car, and pawnbrokers our valuables (like jewellery or expensive household items).
BestUnsecuredLoans only offers borrowers unsecured loans via our panel of lenders. At no stage will the lender we introduce you to try to take your home, your car, or anything else from you if you can’t keep up with your repayments.
Type of loan
BestUnsecuredLoans offers unsecured personal loans to borrowers. While we don’t lend you the money ourselves, we introduce you to finance companies happy to work with you. If you do take out a loan with a provider we put you in touch with, the agreement is between you and your loan company and not BestUnsecuredLoans.
We introduce you to lenders offering personal loans, payday loans, and short-term loans.
Apply for a loan that works for you through Best Unsecured Loans
BestUnsecuredLoans works to find people the cheapest loans for them.
BestUnsecuredLoans is a broker and not a lender. When you make an application through us, we send the information you provide us with together with a copy of your credit report to our panel of Financial Conduct Authority-approved lenders whose profiles you most closely match.
The providers we work with respond in seconds. Each one which says “yes” to your application tells us the deal they’re willing to offer you. That means that you receive the finance you need on the best possible terms for you.
The whole process is done swiftly. And, depending on the lender and on the type of bank account you have, the money could be with you on the very same day.
To start your application, please click here.