Bank Loans

You should only take out a bank loan if you have no access to a low rate overdraft, as bank loans typically have a high rate of interest attached to them.

If you think you do require a bank loan, this section will give you information on what considerations you should take before taking out the loan.

Wherever you borrow from, make sure you know the terms and conditions of your loan, when it is due back and what interest rate you are being charged.

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Different Types of Loan

Unsecured loan

An unsecured loan is a form of personal loan from a bank or building society of up to £25,000. The interest you pay on the loan depends on:

How much you are borrowing
How long the loan is for

They are ‘unsecured’ in that you can borrow without providing the lender with the right to your assets if you default on your payments. The interest rate remains the same for the duration of the loan, regardless of the Bank of England’s base rate.
Within the category of unsecured loan there are both flexible and fixed loans.

Fixed repayment loan

This is where the repayments are the same each month until the loan is paid off. In general they are cheaper than flexible loans and allow you to plan and budget for the repayment. But if you want the option to pay off your loan early this may not be the correct loan, as there are likely to be high fees for doing so, normally one month’s interest.

Flexible repayment loan

A flexible loan is similar to other loans but the repayments are unique. If one month you have more or less money available to repay you can adjust the repayments. It is completely flexible and allows you the security of knowing the loan can be paid quickly without incurring penalties.

They often allow a delay in your first payment of up to three months. Some even feature a 'repayment holiday'. Where you can stop repaying your loan for up to three months. You will however still incur interest during this period. A flexible loan also offers you the flexibility to pay off the loan in full without a penalty at any time.

In general, the rate you will incur and the hidden interest charges mean a flexible loan will cost the borrower more.

Secured Loan

A secured loan is when the money you are borrowing is secured against a valuable possession of yours, usually your house. It offers the lender some form of reassurance should you default on the repayment of your loan. This form of loan should be seen as a last resort as there is the potential for the lender to forcibly take your security away from you. You should only take out a loan of this form if you are 100% certain that you will be able to make all the repayments.

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Considerations Before Borrowing

Borrow as little as possible and aim to repay as quickly as possible, reducing the interest charges

Be wary of hidden extras. Some loans will place the money in your account within 24 hours BUT there is a fee for this, usually around about £45.

If you are a graduate take advantage of the banks' graduate loans. The interest rates attached are higher than the government subsidised student loans, but these are still better all-round deals than personal loans.

Do you really need a loan? If you are looking to borrow a relatively small amount then take advantage of credit card offerings. A 0% purchase credit card allows you to spend interest free over a relatively short period of time. Credit card balances are considerably cheaper than loans, especially for low value borrowing.

Take advantage of tiered interest. If you are going to be borrowing slightly less than a new tier, then increase your loan to take advantage of the tiered interest.

Avoid payment protection insurance. If you do want to take out loan insurance then do so independently from your provider. Use antinsurance.co.uk, britishinsurance.com, securityfirst.co.uk or paymentcare.co.uk

Be wary of borrowing from any organisation which doesn’t have an understanding of students' needs. They will not be aware of the circumstances which are unique to you and may impose harsher penalties.

Make sure you consider the Total Amount Repayable (TAR) as well as the interest rate on a loan to ensure you understand exactly what the loan will be costing you.

Avoid consolidation loans (swapping many payments to one monthly payment) if possible, as it will work out more expensive. Also many consolidated loans are actually secured loans – an area which students should not even be contemplating.
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