Our Getting-a-Loan Jargon Buster
This article at a glance:
- Some of the words and phrases you’ll come across when looking for finance can be really confusing, they’re often words we don’t tend to use in our day-to-day language
- Here we clear up the confusion, by defining some of the most common finance jargon
- Covering everything from APRs, to the pros and cons of a secured loan – we’ll help you feel finance savvy, and to know what’s what when it comes to securing a loan
Administration fee – sometimes called a documentation fee, this is a charge for setting up finance and issuing the relevant documents needed. The cost will usually be included in the total amount you have to pay, and taken into account when the Annual Percentage Rate (APR) is worked out.
Agreement term – the agreed length of time which you have to repay the finance over. The longer the term, the lower the payments each month.
APR – this stands for Annual Percentage Rate. The APR figure helps borrowers compare credit costs across lenders. The APR calculation takes into account interest and other charges (such as set-up fees). Your credit score can impact the APR you’ll be offered, which could be more or less than the representative figure advertised.
- Representative APR
The representative APR is an advertised rate, which at least 51% of those accepted for the loan product will get. That means that almost half the people who are approved for the deal might not qualify for this rate, and could have to pay more.
- Personal APR
A personal APR is the rate you’re actually offered when you’ve applied for finance – this could be the same as the representative rate, or it could be higher, depending on several factors, such as how you’ve managed your finances in the past (as shown on your credit file). The lender will usually decide what rate to offer you based on how your financial information, given in your application, matches their criteria.
Balloon payment – this is a large final payment that’s paid at the end of some car financing agreements – so it comes after a set time period, usually of several years, of repayments. This figure should always be worked out and agreed at the start of the agreement, and once paid allows you to have full ownership of the vehicle.
Credit Score – your credit score is a number given to you by a credit reference agency, and is based on your history of paying back previous and existing debt.
This is used by lenders so that they can determine whether you are likely to repay any debt they’re considering lending you.
The information held on your credit report is used to decide:
- Whether the lender wants to lend to you
- How much they’ll lend to you
- How much interest you’ll have to pay, which will impact how much you pay each month
The most recent information on your file will be deemed the most important, as lenders will be most interested in your current financial situation. Lenders might be less likely to lend to you if they consider you a higher risk – and this might be because in the past you’ve made late payments, or have shown you’ve not always been able to pay back everything you owe.
Where is my information stored?
In the UK, everyone’s credit file is held by credit reference agencies. These companies collate all the information held about you when it comes to how you manage your debt. The information they hold reveals how well you’ve managed your personal finances in the past as well as the financial commitments you have now. From this, lenders decide on how great a risk you would be if they were to lend you money. The three credit reference agencies in the UK all have slightly different scoring systems, and they are:
Deposit – this is largely for car loans or mortgages – it’s an initial payment paid by the customer, towards the overall cost of the vehicle or house. This can be paid financially, or in the case of car loans, sometimes in the form of the customer’s previous vehicle they wish to trade in.
Early settlement – if you pay off a finance agreement before the agreed term is completed, you might be able to save on interest that would have been charged to you otherwise – paying early is known as an early settlement, and there’s often an early settlement fee that will be asked for.
Hire Purchase – used a great deal in car financing and often shortened to HP.
This finance deal normally involves putting down a deposit and then is paid with fixed monthly repayments. Once the debt has been repaid in full you
officially own the car.
Joint loan – it’s often possible to apply and sign a finance agreement with two or more people. In this situation, everyone named on the loan is responsible for making sure it’s paid back – used most commonly in mortgages.
Lease Purchase – another type of car financing, sometimes called LP, this form of finance works almost exactly the same as a personal contract purchase. The main difference is that, at the end of the term, the final balloon payment must be paid.
Payday loan – a payday loan can be thought of as a loan that acts as an advance on your salary. They’re different from the more common personal loan because they are:
- for a much shorter term – usually less than a month
- for smaller amounts – usually anything between £75 and £1,000.
In the past, payday loans have always been offered by cheque cashing businesses as an additional service, but more recently online lenders have emerged, who have made it easier than ever to get one. However, the big negative is the cost of borrowing this way.
Personal Contract Purchase – often called PCP, this is a type of car finance that’s repaid with monthly payments, often starting with an initial deposit. You don’t own the car unless you decide to pay the optional balloon payment at the end.
Personal loans – A personal loan, also known as an unsecured loan, allows you to borrow money in exchange for paying a certain amount of interest, which will be charged as long as it takes you to pay off the loan. You’ll need to make a set repayment every month for a period of time that is previously agreed on with your lender. To get the best deal with a personal loan it’s important to compare the different APRs on offer – or have a company like Better Chance Finance do the looking around for you.
Unsecured personal loans are lower risk than secured loans as they do not require you to guarantee the loan against your property.
Secured loan – this is where an asset – usually a house – is used as equity against the loan. Often secured loans are of interest to people with a less than perfect credit rating, as they can sometimes find it hard to get finance secured without providing this extra level of security to the lender.
Pros of a secured loan:
- Secured loans are available for much larger amounts than personal loans, which generally only go up to about £25,000
- If you have a bad credit history, you may find that you have no choice but to opt for a secured rather than a personal loan
- The repayment periods on secured loans can be longer, while the fixed monthly payments should make it easy to manage your repayment plan
Cons of a secured loan:
- You need to keep up repayments on a secured loan, or you risk losing your home
- Check the terms and conditions for fees and charges, for instance early repayment penalties
Top Finance Tips
- Check your credit score before applying for a loan, and take steps to improve it, that way you’ll be more likely to be approved for finance in the future
- Try to avoid applying for multiple loans at the same time, as this can look like desperation to lenders, and can lower your credit rating
- Work out a budget, so you know exactly how much you need to pay and how much you can afford to pay off each month
- Check the small print before you agree to a loan – one of our advisers will be able to answer any questions you have about this
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