Baffled by loan terminology? From APR to ERC, we’ve got the key terms covered!
Affordability: whenever you apply to borrow money, your lender must check that you can afford to repay it. They make various checks – including on your income and outgoings – to confirm this.
APR: The most common term you’ll see when reading about loans is APR, or Annual Percentage Rate. An APR shows the total cost of borrowing over a year, including interest and upfront fees and charges. It’s a good way of comparing the cost of loans when shopping around.
Country Court Judgement (CCJ): If you fall behind on the repayments on a loan your lender can ask the County Court to issue a CCJ against you. If you don’t repay the debt in full within 30 days then the CCJ will show on your credit record for six years. This will have a negative impact on your credit rating and could make it harder to get a loan or mortgage over that period.
Credit rating/score: Your credit rating is the score that you’re given based on your personal credit history. You can find out your credit rating via the three main credit reference agencies Experian, Equifax or CallCredit. If you’re credit rating is not great, there are loans specifically designed for people with bad credit, like those offered by Ocean Finance.
Debt consolidation loan: If you have got a number of loans, credit cards or other borrowings with a range of lenders, you could take out a debt consolidation loan to repay all of these in one go. You can then just make one monthly repayment (which is often more affordable) rather than lots of smaller ones. Remember, if you extend the term of your debts, you may end up repaying more overall though.
Early repayment charge or penalty (ERC): In some cases lenders will charge you a penalty if you decide to pay your loan off earlier than was intended. If you think you might pay off early it is always worth checking the T&Cs before committing to a loan.
FCA: The Financial Conduct Authority is the UK financial regulator. Their job is to ensure that firms that provide services to customers, including credit card providers, mortgage lenders, personal loan and brokers treat their customers fairly and operate within its rules. Always check that your lender or broker is FCA regulated – you can do so by visiting https://www.fca.org.uk/firms/consumer-credit-register
Fixed interest rate: When borrowing it’s important to check if the interest rate is fixed for the period of the loan – so you’ll know that your repayments won’t vary. Most personal loans, for example, have a fixed interest rate – so the lender can’t change it once you’ve signed up. Many mortgages, by contrast, have variable interest rates which means that they may rise or fall over the life of your mortgage.
Hire Purchase: This is a way of buying without having to pay the full amount up front, the cost will instead be covered in instalments. Hire purchase is a common way to buy a car and you can read more about it, here. With hire purchase, you don’t own the product outright until you’ve made the final payment – which means is even more important to keep up with the repayments or you may lose the item you are buying.
Interest: This simply means the amount you’ll be charged when you borrow money. For example, if you borrow £200 at an interest rate of 10% for a year, the total amount you’ll have to pay at the end of the year will be £220.
PPI: Payment Protection Insurance is designed to cover your loan or credit card repayments in the event of an accident, sickness or unemployment. It was widely miss-sold in the past and is now rarely offered to borrowers. If you’ve borrowed money in the past and took PPI you may be entitled to compensation.
Representative example: Many lenders offer a “price for risk” approach, which means that they offer people with a worse credit rating a higher interest rate. They must, however, quote a “representative APR” and this must be offered to over half (51%) of successful applicants. The other 49% could be given a different rate – usually higher.
Responsible lending: lenders must lend responsibly – this means that they must check that you can afford to repay your borrowings, and that you are not becoming over committed. If they don’t believe this to be the case, they may turn down your application for credit.
Responsible borrowing: by the same token, you should think carefully before you borrow money. Are you sure that you can really afford to repay it? What would happen if your circumstances changed? Do you really need to borrow the money? For example if you are thinking of taking a loan for a fancy foreign holiday, would it make more sense to have a cheaper holiday in the UK and not have to borrow? Or would you be better of saving up for an item rather than buying it now on credit?
Secured loan: This is a loan that is secured against an asset of yours such as your home, for example, a mortgage. If you don’t keep up repayments on a secured loan, your asset it’s secured against can be repossessed.
Unsecured loan: Often known as personal loans these are the most common type of loan - you borrow a lump sum and then pay this back in regular payments to your lender. Unlike a secured loan, it’s not attached to any of your property – instead, it’s agreed to on the basis of your financial position and creditworthiness.
Now you’re clued up loan terminology, you can rest assured you know what any confusing terms mean. If you’re still looking for a loan, Ocean offer both personal and homeowner loans that can be used for a variety of purposes.
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By Hayley Cox