How to raise money when times are tough
Credit cards and loans are harder to come by, but they're not the only way to borrow, says James Daley
Saturday 30 August 2008
After a decade of cheap and easy credit, getting your hands on a mortgage, personal loan or credit card has become much tougher and much more expensive over the past year.
While the most competitive two-year fixed-rate mortgages were priced in line with, or even below, the Bank of England base rate last summer, the cheapest two-year fix you'll find today is more than 0.5 percent above the current base rate – and you'll pay much more if you don't have a good deposit and credit rating.
Nevertheless, the credit markets have by no means dried up entirely. Credit cards, loans and mortgages are still readily available – even for those with low incomes or less than perfect credit history. Consumers may just need to look a bit harder for what they need.
According to Moneyfacts.co.uk, a financial comparison website, the average interest rate on a three-year £5,000 personal loan has increased from 8.1 per cent to 11 per cent over the past two years.
Furthermore, there's no doubt that rejection rates are much higher today than they were back then. However, the total amount of new personal loans handed out in July was still only down 16.7 per cent on an annual basis in July, much less than the sharp falls seen in the mortgage market. Banks are still lending more than £2bn a month in unsecured debt.
Perhaps the first thing you should do before looking for a personal loan is to ask yourself if you really need it. If you're thinking about buying a new car or having a new kitchen installed, for example, could you try saving for it instead? Even waiting for a few months could save you thousands, as interest rates are expected to fall over the next year – and you'll also the benefit of any additional savings you can make over the months ahead.
If you do really need a loan, then the next step has to be to take a look at your credit rating – as the cheapest rates are now only available to those with the cleanest records. Credit rating agencies such as Experian and Equifax allow you to order a hard copy of your credit file for as little as £2. Alternatively, you can view the file online by subscribing to services such as Experian's Credit Expert (www.creditexpert.co.uk), which is free for the first 30 days, and then costs £6.99 a month.
James Jones of Experian says that there are some simple steps you can take to ensure that your credit file looks as good as it can. "Make sure you're on the electoral roll at your current address," he says, "especially if you've moved recently. Obviously, if you've struggled in the past financially, that's going to be recorded on your file, so it's also important to make sure any arrears are paid off – and it may even be worth explaining why you had a problem if you've got a good reason. You can put a note of up to 200 words on your file, and lenders may take it into account when making a decision."
Jones adds that you should also check that you don't haven any links to people on your credit file which are no longer relevant.
Anyone you've had a joint bank account or joint mortgage with will be linked to you on your credit record, and could damage your chances of being accepted for a loan if they've got a bad record themselves. So if you find that your ex-girlfriend or former business partner is named on your file, you should write a letter to the credit agency asking for the link to be removed.
Finally, Jones advises that you check that all other information on your file is correct. Occasionally, mistakes do creep onto credit files, but you can get these rectified by taking it up with the financial organisation which has put the black mark on your file.
Once you've got an idea of how good your credit score is, you can think about looking for a loan. Websites such as moneyfacts.co.uk and moneysupermarket.com are useful for comparing the best deals on the market – and the moneysupermarket site even has a function which allows you to filter results according to the strength of your credit score.
If you've got a squeaky-clean record, you should be able to apply for the very cheapest loans on the market. At the moment, the lowest unsecured personal loan is offered by Asda Personal Finance, who are charging 7.4 per cent. If you've got a slightly weaker rating, you may be better off starting slightly lower down the table – as you're unlikely to get the best rates.
The high-street banks and specialist lenders that you find on the internet are not the only way to get your hands on a loan. If you only need to borrow a relatively small amount – up to £2,000 – it's well worth exploring whether a credit union could help you. Credit Unions are financial co-operatives, owned and run by their members – a bit like a building society. You'll need to work or live near one to qualify – or be part of a company or trade union which has a credit union available to its employees or members. British Airways, for example, has its own credit union. The website www.abcul.org.uk will help you search for one in your area.
Mark Lyonette, the chief executive of the Association of British Credit Unions, says most credit unions will charge just over 1 per cent a month for their loans, which works out at around 13 per cent a year. Some will charge more, but none charge any higher than 2 per cent a month, or 26.8 per cent APR.
Although credit unions will credit-check you, Lyonette says the organisations tend to be slightly more relaxed about accepting people who have had a bad credit history than mainstream lenders.
If you don't have any luck with a credit union, you could resort to a doorstep lender such as Provident Financial and Cattles. These companies will lend as little as £50. However, you could get charged an APR as high as 400 per cent, so these really should be a last resort.
If you're looking for a large sum of money, and have a valuable asset that you can offer as security, then it may be worth your considering an asset-backed lender such as Credit & Mercantile (www.creditmercantile.co.uk), which lends to people looking to raise between £200,000 and £15m, without looking at their credit history. C&M is interested in the asset, not the customer. So if you have a house worth £500,000, which you own outright, it might loan you up to two-thirds of the property's value, but would want first charge on the asset were you unable to repay.
The key to getting a good rate on your mortgage at the moment – aside from having a good credit record – is having a decent deposit, or a reasonable amount of equity in your home if you're remortgaging. For first-time buyers, it's now all but impossible to get loans of more than 95 per cent of the value of the property you're purchasing – and you'll pay plenty for borrowing so much at a time when the housing market looks so precarious.
The cheapest rates are now reserved for those who own 50 per cent or more of their property. Britannia Building Society is currently offering two-year fixed-rate mortgages at 5.99 per cent for people who don't borrow more than 50 per cent of their property's current value. If you need to borrow between 50 and 75 per cent, however, this rises to 6.39 per cent, while if you need between 75 and 90 per cent, you'll be charged 6.79 per cent.
"If you don't have a deposit your options are limited," says Melanie Bien, director of independent mortgage broker Savills Private Finance. "Many lenders will no longer lend above 90 per cent LTV (loan to value), so ask your parents if they can help with the deposit. Or check out the Government's shared equity scheme, which has been extended to all first-time buyers with a household income of less than £60,000. Because you get an equity loan for part of the cost and a mortgage for the remainder, you don't need a deposit.
"Alternatively, you may have to consider returning to old-fashioned values and saving for a deposit. With property prices falling you don't run the risk of pricing yourself further out of the market while you save."
Although it makes sense to use a broker – such as Savills (www.spf.co.uk) or London & Country (www.lcplc.com), which is fee-free – to carry out a sweep of the market for you, it may also be worth doing a sweep of the biggest lenders' websites to check you're getting the best rate. Some lenders are now offering better rates through their branches than to brokers.
Make sure you're careful to check the fees, too. The mortgages with the lowest rates now tend to come with higher fees. So it'll depend on the size of your mortgage whether they're good value. A low rate and a high fee will be good value for people taking out larger loans, but terrible value for those who need smaller mortgages.
The key to getting a good rate on your mortgage at the moment – aside from having a good credit record – is having a decent deposit, or a reasonable amount of equity in your home if you're remortgaging. For first-time buyers, it's now all but impossible to get loans of more than 95 per cent of the value of the property you're purchasing – and you'll pay plenty for borrowing so much at a time when the housing market continues to look precarious.
The very cheapest rates are now reserved for those who own 50 per cent or more of their property. For example, Britannia Building Society is currently offering two-year fixed rate mortgages at 5.99 per cent for people who don't borrow more than 50 per cent of their property's current value. If you need to borrow between 50 and 75 per cent, however, this rises to 6.39 per cent, while if you need between 75 and 90 per cent, you'll be charged 6.79 per cent.
"If you don't have a deposit your options are limited," says Melanie Bien, director of independent mortgage broker Savills Private Finance. "Many lenders will no longer lend above 90 per cent LTV (loan to value), so ask your parents if they can help with the deposit. If this isn't an option, check out the Government's shared equity scheme, which has been extended to all first-time buyers with a household income of less than £60,000. Because you get an equity loan for part of the cost and a mortgage for the remainder, you don't need a deposit, but gain access to a wide range of loans.
"Alternatively, you may have to consider returning to old-fashioned values and saving for a deposit. With property prices falling you don't run the risk of pricing yourself further out of the market while you save."
Although it makes sense to use a broker – such as Savills ( www.spf.co.uk) or London & Country ( www.lcplc.com), which is fee-free – to carry out a sweep of the market for you, it may also be worth doing a sweep of the biggest lenders' websites to check you're getting the best rate. Some lenders are now offering better rates through their branches than they offer to brokers, so you could get a better deal direct.
Make sure you're careful to check the fees too. The mortgages with the lowest rates now tend to come with higher fees. So it'll depend on the size of your mortgage whether they're good value. A low rate and a high fee will be good value for people taking out larger loans, but terrible value for those who need smaller mortgages.
Credit cards are generally not the cheapest option for long-term borrowing, as interest rates often run into the high teens.
However, there is a number of 0 per cent balance-transfer offers still available, which could help you relieve the burden of your debt, as well as of 0 per cent purchase offers.
More recently, there has also been a number of cards that offer permanently low interest rates – and provide some competition to the cheapest personal loans. Barclaycard Simplicity, for example, has a rate of just 6.8 per cent – lower than anything you'll get in the personal-loan market.
If you're looking for a balance transfer deal, Capital One, Virgin Money and Halifax all offer cards which allow you to pay 0 per cent on any balance transferred from another card for 15 months. However, bear in mind that each of these will charge a fee.
Again, it's important to make sure your credit record is as good as possible. Rejections are not recorded on your credit file, but every application is. So if you make many applications at once you're likely to increase the risk of rejection.
If you're looking for the longest 0 per cent rate for purchases on a card, you'll find that Capital One and First Direct have the best offers, of 14 and 12 months respectively.
Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk
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