Last year, the media was littered with stories detailing the increasing number of students that were relying on payday loan companies to fund their university education. Research by Future Finance found that 31% of students turn to overdrafts, credit cards and payday loans.
What perhaps was more concerning was the lack of understanding when it came to these finance options, with 40% admitting that they didn’t know what APR meant and only 39% sticking to budgets that had been set.
While student bodies have spoken up to demand the reinstatement of grants and control the growing costs that are associated with a university education, the fact remains that students will continue to turn to alternative ways to cover their tuition and living expenses. With this being the case, we have put together some areas to research before taking out a loan to ensure that you are making the best financial decision.
Whenever you make an application for credit or a loan, it leaves a mark on your credit score. Typically, applications make up 10% of your credit score, so making frequent applications can negatively affect your rating.
However, there are a number of firms that offer a ‘soft search’; soft checks are visible on your credit report but do not impact your rating. So, within reason, you can make a greater number of enquiries with companies that use a soft search without damaging your credit score.
Be sure to seek out companies that use soft searches; this way you can be safe in the knowledge that your actions now won’t impact your financial options later in life.
If you have missed loan or credit-card repayments in the past and this has negatively impacted your credit score, then this could in turn, land you with higher interest rates for future credit.
When you apply for a loan or credit card, the lenders don’t just check your credit score – they apply a ‘rate-for-risk’ price policy. This means that your credit rating will determine how much of a risk you are to that lender – and if you are deemed to be a higher risk, you will find yourself with a higher rate of interest, if you are accepted at all.
The interest rates or APR that is advertised is known as the representative APR, and is only actually offered to around 51% of people that apply – your personal APR may be higher. So, what you deemed to be an affordable option may turn out to be a financial struggle – make sure you know what the APR is before agreeing to the loan.
If you come across a company that agrees to lend you money without checking your history – this is not a reason to breathe a sigh of relief! This has scam written all over it and should ALWAYS be avoided.
You will probably be offered a few options for paying the loan back, that can be anything from months to 5 years.
While paying the loan back over a longer period can be tempting as the monthly repayments are smaller, you actually end up paying back far more money, although the FCA introduced new rules in 2015 which means that borrowers will never pay back more than twice the amount that they initially borrowed.
If you only application for credit or a loan, you may be best suited to a credit card as many also offer ‘interest-free’ periods.
Keep in mind that late payments incur a fee or between £12-£30 pounds with interest on top. If you are having a problem repaying loans, do not take up offers of ‘deferrals’ or ‘rollovers’ – these can leave you with further fee’s and increased interest.
A secured loan is one where the debt is linked to the borrower’s property and is also called a homeowner loan; as a student, the likelihood is that you are going to be offered an unsecured loan.
Unsecured loans are available to a wide range of people, and they can be a flexible option, but the shorter repayment terms often mean higher interest rates. The difficulty is, as a student, you won’t have the option of taking a secured loan.
Interest Rate Comparison
As mentioned earlier, you may see several APR rates advertised across a range of loan companies – but don’t get drawn into the one that is offering the ‘best rate’ – keep in mind this is representative only.
The final rate will be based upon your personal credit rating – be sure to ask the lender these questions if you are applying face to face, or seek out your rate in the terms and conditions before agreeing to the loan.
Be aware that your interest rate CAN increase if you miss a payment.
Penalties for Early Repayment
Say you came into some extra finances and could pay your loan off early, you could clear your debt and the company gets its money back ahead of schedule. Great idea for all involved, right? Wrong.
Paying back a loan early might mean that you are landed with extra charges; terms o look out for include –
• Early repayment charge
• Early repayment penalty
• Redemption charge
• Financial penalty
The amount you are charged usually equates to one or two months interest and the earlier that you repay the loan, the higher the repayment charge is.
However, not all loan companies charge for early repayment, so add that to the list of requirements you are looking for in a loan company and you are giving yourself some extra flexibility.
If you decide to get a loan, make sure you use a lender that is regulated by the Financial Conduct Authority (FCA). This should be displayed on their website, or in branch; while all lenders are required to be regulated, there are some that still manage to operate under the radar.
There you have it, some of the ways that you can make some smart financial decisions when it comes to choosing your loan. We want to stress that taking out loans isn’t the most affective way to manage your student finances, and there may be more effective, less expensive options that will also leave you worry free. If you are to choose this option, make sure that you are choosing a company that is going to provide you with flexible terms and affordable payments to preserve your credit history, keeping your options open for later in your life.