Before you apply
Before you apply for any form of credit, you’ll need to think about how you’re going to repay the loan. Consider whether you have the income needed to cover the repayments. You should also bear in mind that when you start earning over the threshold, you’ll start repaying your student loan too. These payments are automatically deducted from your salary. So, if you’re considering taking out a loan you should factor this into your budget as well.
Getting a loan
If you're looking for some extra financial support after university, a loan could seem like the obvious choice. With a graduate loan, you pay back a certain amount each month with interest, over a fixed period. You don’t need to be a homeowner to take out a graduate loan, as it’s unsecured (meaning it’s not attached to a property).
What do you need to get a graduate loan?
The lender you apply to will most likely look at your:
- income and outgoings
- whether or not you’re earning enough to make your repayments
- how long you’ve been in your current job
- whether you share any financial links with someone else
- if you’re on the electoral roll
- your credit history (I.e. how well you have managed your finances in the past)
If you’ve just graduated you may not have much credit history behind you. So, lenders may not be able to tell if you’re going to be a responsible borrower, which could put them off. However, graduate loan providers should be more lenient, as their products are designed for those who’ve just graduated and haven’t had the chance to build up a good credit history yet. So, you may find it easier to get a graduate loan compared to a mainstream loan if you are in this position.
Repaying your graduate loan
If your application for a graduate loan is accepted, you’ll make one fixed payment a month for the term of the loan, which will include both your outstanding balance and interest. The total cost of borrowing is known as APR (Annual Percentage Rate). This includes all interest and charges you are expected to pay on an annual basis (not including one-off fees like late payment charges). It’ll be set out in the credit agreement and is normally expressed as a percentage.
The interest rate you end up with may be higher or lower than you originally saw advertised. What you’re offered all comes down to your personal circumstances and how well you’ve managed your borrowing in the past.
Lenders will use the term 'representative’ to describe the average APR rate they’re advertising. The FCA's rule is that lenders must show the rate that 51% of their customers get, or lower. This means if they advertise a rate that only a small percentage of people get they must also show the APR representative rate. When it comes to your individual application, they’ll consider your credit history and personal details, which is why your rate might differ to what’s advertised.
Graduate loan vs Unsecured loan
Graduate loans and unsecured loans essentially work in the same way, but because a graduate loan is specifically designed for those who have recently left university there are some differences. For example:
- the interest rate for an unsecured loan may be higher than on a graduate loan (but it’s always best to shop around to make sure you’re getting the best deal available to you)
- you might not be able to borrow as much with a graduate loan as you would with an unsecured loan
Other things to consider before applying for a graduate loan
One thing to bear in mind, is that if you apply for a graduate loan, you might need a current account with the same lender that provides it. This is because the lender will already have a record of your financial history. They’ll use this as proof of your ability to manage money if your credit history is limited.
If you think a different bank or building society provides a better graduate loan deal than your current one, you could consider switching your current account over first. However, one of your preferred lender’s requirements could be that you’ve had an account with them for a few months. So give yourself time to switch before you need to borrow (if this is a stipulation that could affect you).
Borrowing to fund further studies
If you’re considering borrowing to fund further studies, there are other types of finance available to fund this. For example, you could consider an Advanced Learner Loan. An Advanced Learner Loan provides funding for a course at a college or training provider in England. How much you can borrow depends on the cost of your course.
Read on for more information about funding for vocational courses.
Alternatives to graduate loans
Just because you’re a graduate does not mean that you’re restricted to taking out a graduate loan. There are other options to choose from including:
- unsecured personal loan
- credit card
Unsecured personal loans
Unsecured personal loans work in the same way as a graduate loan. You don’t need to be a homeowner to apply, as a personal loan isn’t attached to anyone’s property.
However, with personal loans, there’s a wider market to choose from and you may also be able to borrow more compared to a graduate loan. Be aware, because this type of loan is not specifically designed for graduates, you may find the conditions are stricter. For example, a limited or non-existent credit history or low income might make it more difficult for you to get approved.
An overdraft could provide you with the cash boost you’re looking for after university or college. There are some accounts designed to offer overdrafts to graduates, but you don’t necessarily need to be a graduate to get one. Some banks offer graduates a 0% overdraft, which is likely to be one of the cheapest ways of borrowing as you won’t be charged interest if you stay within your pre-arranged overdraft limit.
Be aware that your overdraft will have a set limit and if you exceed this you could be hit with extra charges – some lenders even charge you for every day that you’re over your agreed overdraft limit. These fees depend on the type of account and lender so it’s best to check this before you start using it. The FCA have recently provided an update on current costs of overdraft fees for banks.
You should also keep in mind that the 0% will only be for a limited time, so you should aim to be out of your overdraft by the time the deal ends. Otherwise, you’ll have to start paying interest on the remaining balance.
Another option is to get a credit card. Your credit history will play a part in lenders determining whether to approve your application – more so than it would for a graduate loan. So, if you have a very limited history of borrowing this might not be the best option for you.
However, there are credit cards specifically designed for people with no credit history and those who have struggled with managing their borrowing in the past. These might be a more suitable option for you. Bear in mind, they usually come with higher interest rates and lower credit limits.
If you plan to borrow money to pay for a one-off purchase like a car or further qualifications, a loan might be better. The amount you repay each month and the interest you’re charged tends to be cheaper than on a credit card. Plus, because you pay back a fixed amount each month, your budgeting should be easier to manage.
Affording your repayments
Whatever form of credit you’re considering, it’s vital that you keep up with your repayments. If you fall behind, your credit history will be at risk and this could make it difficult for you to borrow again in the future. Plus, you may be hit with late payment fees that make it harder for you to afford your repayments and get out of debt.
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Intelligent Lending Ltd is a credit broker working with a panel of lenders.