- Have you recently found yourself sweating at the mention of the "base rate"?
- Do you turn on the TV especially to watch the results of the Bank of England monthly meetings?
If you do, you are not alone! Around 6.5 million of us reckon the last base rate hike is going to leave them struggling to pay the mortgage.
For many of us this could mean a significant change to our lifestyle. If you’ve had your eye on a new car or were looking to update your wardrobe for the summer then increased mortgage repayments could put a halt your plans.
One option for some people is to take the pressure off the day-day expenses with an unsecured loan. The key to getting a good deal on a personal loan is to check what is on offer – if you tie yourself to a poor deal then you could easily find yourself in a worse position than you started in.
How it works
To get an unsecured loan you simply have to show that you can afford to make the repayments with interest. Unsecured loans are generally viewed as a smaller commitment than secured loans, whereby you use your house as collateral against the money you borrow.
So how would an unsecured loan help you to cope with the squeeze on your finances? The loan provider will pay you a lump sum of anything up to around £20,000. With this cash you should be able to take some of the pressure off your usual expenditures by consolidating all your other debts – credit cards, overdraft, etc. – as well as using the money to maintain your current standard of living. Perhaps you could drive that car off the forecourt after all.
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Get your rate right
Interest rates on loans can vary dramatically, so the key is getting a loan with a low APR. This may sound obvious but few of us actually take the time to work out how a couple of percent difference will affect our monthly repayments.
There are a quite a few lenders out there offering APRs of 9-10 per cent or more. Above nine per cent is not a good deal. Anything around 6.5 per cent is a good rate at the moment.
For example, £10,000 repaid over five years at 9 per cent will cost you £207 a month. The same loan on a cheaper rate of 6 per cent will only cost you 193 a month – if that doesn’t sound much, over the term of the loan the difference is nearly £1,000 in interest repayments.
Black Horse Personal Finance’s 10.9% loan for example will leave you having to pay out £5884.45 over three years for £5,000. If that doesn’t sound too good then Zopa will charge 11.03%, although this is aimed at people with relatively poor credit ratings. Great Universal could charge you as much as 15.9% APR.
Loans with such high APRs normally have features or application procedures which make them more accessible to people on lower incomes or with worse credit ratings. In some cases you’ll need to show you have an income of at least £25,000, but many loans’ application procedures don’t require you to state a minimum income.
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Unsecured short term solutions
A personal loan could help you to meet the cost of living, to consolidate your debts or perhaps to finally afford that big purchase that is slowly getting out of reach as your mortgage payments keep rising.
If you are struggling now it’s important to consider your current mortgage deal and whether it might be possible for you to switch to one at a better rate and to remember that just because it’s an unsecured loan doesn’t mean to say providers won’t hold you responsible if you can’t meet repayments. In short, only borrow what you can afford.
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