What Every Student Should Know Before Applying For a Loan
Recent research has uncovered that a rising number of students are turning to alternative means to fund their studies. Future Finance found that 31% of students now use payday loans, credit cards and overdrafts to cover the cost of higher education.
While there are many individuals from all walks of life who turn to these financial products, it is the lack of understanding among students that has become a cause for concern. 40% of students have admitted that they don’t know what APR means and only 39% of students stick to set monetary budgets.
The reinstatement of grants have been demanded by student bodies and many are calling for the growing costs of university education to be brought under control. However, the fact remains that it’s necessary for students to fund their studies and living costs with alternative means As this is the present reality, we have put together a guide to what to look for in a loan provider to ensure that you make the best financial decisions for you now, and that will not impact your financial history further down the line.
Every time that you apply for credit, it leaves a mark on your credit score. Credit could be in the form of loans, credit and store cards, and mobile phone contracts; even if you are not accepted for the product, the footprint is still left.
10% of your credit score is made up of applications and having too many can negatively impact your credit score, meaning that you will be unlikely to get credit and financial services, including a mortgage later in life.
It’s important to seek out financial firms that offer a ‘soft search’ facility. While these searches are still visible on your credit report, they have no impact on your rating. In theory, this means that you can more enquiries using companies with a soft search facilities without damaging your credit score and impact your financial future.
The repayment of loans can range between a few months to five years. Although it can seem more affordable to choose a longer repayment term because your monthly outgoings are reduced, in the long term, you end up paying back more.
To put a cap on how much extra is repaid, the FCA introduced new legislation in 2015 that ensures borrowers will never repay more than twice the amount that they borrowed.
Missing payments will also mean that you pay back more money; each late payment incurs a charge of between £12-£30 pounds with added interest. Avoid the offers of rollovers or deferrals too, these can leave you with further fees to pay.
If the money required is only needed for a short time, its best to opt for a credit card as many come with lengthy ‘interest-free’ periods.
When it happens, missing a few credit card or loan repayments may not seem like the end of the world – but they can have an impact on your credit score, and this, in turn can mean that you are offered a rate of interest on future credit.
Credit lenders not only check your credit score, they also apply for a ‘rate for risk’ price policy. This will indicate to lenders how much of a risk you are; the higher the risk due to missed payments, the higher the rate of interest you are offered, providing of course that you are accepted at all.
The rates of interest that are advertised with financial products is the ‘annual percentage rate’ or APR, not the rate that you are guaranteed to be offered. Only 51% of people that apply for credit are offered the advertised APR, the rest are landed with higher rates.
It’s imperative that you unveil what rate you will be offered before accepting the loan or credit card, because it could make an affordable repayment a financial struggle.
It may be tempting to choose a company that agree to lend money before they check your credit report, but these are always a scam and should be avoided every single time.
Take the time to compare interest rates, as we previously touched upon the fact that you will see several rates advertised and remember the best rate that you find is representative only.
Your credit rating will determine the final rate, so be sure to enquire with lenders what the true rate of interest will be, before making your decision.
Secured Loans VS Unsecured Loans
As a student, it’s likely that you will only be offered unsecured loans, but it’s best practice to know the difference for reference.
Secured loans are also known as ‘homeowner loans’ because the debt is related to the property that is owned. Therefore, unless you own a property – as a student you won’t take advantage of this product.
Unsecured loans are offered to an increased number of people; and while they are flexible, they come with shorter repayment terms which can also equal higher rates of interest.
In theory, paying the debt off early is a good move because you reduce your outgoings and the lender is repaid in full, early; however, it’s important to know that paying your debt off early may result in you incurring further fees.
Be sure to check your terms and conditions for the following wording;
Early Repayment Charge
Early Repayment Penalty
You will usually be charged an extra one or two months’ interest for early repayment and the lender wants to re-coop the interest that they were anticipating on receiving over the term of your repayments.
It’s worth noting that not all loan companies charge borrowers for early repayment, so be sure to seek out the companies that don’t charge you to give yourself more financial flexibility.
In the instance that you decide that you still want to take out a loan, you must opt for a lender that is regulated by the Financial Conduct Authority; and you will find this mark of approval in branch, or on their website.
If you are unsure – make sure that you confirm this with the business; all lenders are legally obliged to be regulated, there are still some unscrupulous lender that operate without regulation – and they spell trouble for borrowers.
While, as a student, we urge that you exhaust all other avenues before choosing a loan, we also encourage you to find a lender and a product that offers you affordable and flexible repayments so that you can focus your mind on studying, and not on financial worry.
This article was provided by Everyday Loans.