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Unsecured Instalment Loans
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Loans come in all shapes and sizes, There are loan that last only a matter of days, (Wonga.com the UK's largest lender claims that its customers borrow for an average of 17 days) and there are loans that last 30 years such as a mortgage on a property and of course there is everything in between.
With the exception of mortgages, most loans last up to 10 years, with loans above 18 months up to 60 months typically being personal loans. Often a personal loan will be arranged through your bank or one of the specialist companies that offer longer-term loans. These loans are often secured on a property and used to be called second mortgages. Now they tend to be called secured loans. Taking out a secured loan is a serious consideration. If you were unable to keep up the repayments on a secured loan you would lose the asset that the loan was secured to, often your home. This is why there are strong and meaningful regulations surrounding secured loans.
If there are secured loans, there must be unsecured loans, which of course there are and this is what we will focus on in this article. Unsecured loans are offered on the basis that the borrower does not need to have any asset to secure the loan against. The good news for the borrower is that they do not have to have a property to get the loan; the bad news for the borrower is that typically these loans carry a higher interest rate and are more expensive. The reason that these loans are more expensive is because the lender is taking a higher risk, as he has nothing to secure the loan against.
Most personal loans are repayable over a fixed period of time with repayments being the same for each month of the loan. So if you borrowed £5,000 over 60 months the amount that you had to pay each month would be the same for all 60 months. This is an instalment loan, spelt installment loan in the USA.
Instalment loans start from a 3 months loan (in theory they could be over 2 months, but this does not happen in practice) and go all the way up to 120 months plus.
The length of the loan is typically dictated by the amount of money being borrowed. It would be impractical to borrow £5,000 as a 6 month loan as the monthly repayments for capital alone would be £833 and interest would need to be added to this figure. The also is true the other way around, it would be impractical to borrow £300 and spread the repayments over 60 months as the capital repayments would only be £5 per month and ultimately the interest charged would far outweigh the capital borrowed. So there is a natural process of matching loan size to the rough length of the loan.
Car purchases are often instalment loans, although the motor trade has particular names to describe their products that do not exactly match normal banking and financial terms.
Different types of organisations offer the different type of instalment loans. Banks tend to offer loans in excess of £1,000 and tend to offer their loans to people with good credit history, whereas online lenders tend to offer instalment loans of less than £1,000 right down to £100. Online lenders tend to take on customers with less than perfect credit history and in return they demand a much higher interest rate as this reflects the risk they are having to take with each loan.
Online lenders also tend to offer their loans over a shorter time period. Small instalment loans of up to £500 lend to be offered over no more than 12 months, although a majority are probably 6 month loans or less. Strangely enough, instalment loans of less than 12 months tend to jump in 3 months steps: 3 month loans, 6 month loans, 9 month loans, 12 month loans. It is rare to see 2 month loans, 4 month loans, 5 month loans, 7 month loans, 8 month loans, 10 month loans or 11 month loans.
When considering applications from consumers all lenders, be it the big banks, the payday loan companies or the instalment loans companies view every application carefully. Most, if not all, reputable companies will undertake a number of checks on the applicant before lending. These checks will start with something called the AML (anti money laundering) check and this is looking for criminals who have maybe stolen someone's identity or organized criminals. The lender will also do checks to make sure that the name and address being used on the application matches the bank account and details being given in the application. They will make sure that the name on the bank account matches the name of the applicant to be sure they are paying the money into the right bank account. Once they are satisfied themselves that they are dealing with the right person they will then do checks to decide if they person applying is likely to pay the loan back and if they can afford the loan.
These checks, like the AML checks will involve online searches to credit reference agencies and other third party suppliers. They will be able to see if the applicant has paid back previous loans, how much they owe on other forms of borrowing such as credit cards or bank loans, they can see any other applications made with other instalment loans companies or with payday loan companies.
The lender will use software called a Decision Engine to decide if they want to lend and if they want to lend over what period of time and how much they wish to lend. If a customer does not repay their instalment loan the lender will often report back to the credit reference agencies so that in the future other lenders will be able to see that the borrower has not repaid previous loans.
Something that many borrowers do not realize is that if you default on the loan and enter into a payment loan with the lender, when the loan is paid off this still counts as a default. This is because they have not kept to the original signed loan agreement even though they may have repaid all the money borrowed.
Kieran Moulden is the Founder and Managing at Fidelity Works which owns a number of instalment loan brands including UK Instalment Loans a company offering instalment loans over 3, 6 or 9 months, with fixed repayments and no fees, just daily interest.
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