« »

Tuesday, July 23, 2013

Understanding APR: Everything you need to know

APR may rise if insurance premiums are included in its calculation
APRs differ between secured and unsecured loans

By Barry Davis

Lenders advertise their lending products by their typical APR (Annual Percentage Rating).  The typical APR for a particular lender is the interest rate that they offer at least 66.6% of their customers.

How does APR affect my loan search?

Comparing APR on loan products is traditionally seen as a good way to compare lenders.  However, comparing like-for-like products according to APR is difficult because there are so many influencing factors that make up the rate that you, as a borrower, will be offered. Typical APRs offered for unsecured loans and secured loans will be different; when comparing loans based on APR you cannot compare secured with unsecured loans as the APRs do not correlate. 

When you apply for an unsecured loan with a lender, the APR offered to you will depend on a number of factors.  The most important thing is your personal history of borrowing and credit rating.  This is closely assessed by potential lenders as an indication of the risk associated with lending to you.  If your credit rating is high, you may be offered a very competitive APR close to, or even lower than, the advertised typical APR.  However, if your credit score is less than perfect you may find that you only qualify for much higher interest rates, or may be refused altogether, especially when applying for unsecured loans.  This is because if your credit history is poor you present a higher level of risk to the lender, and this risk will be offset with a higher interest rate. 

If you apply for a secured loan, your personal credit rating is less of an influencing factor on APR, as you are providing collateral for the loan to reduce the risk on the part of the lender.  This is why many borrowers with poor credit scores find their best chance of finding an affordable loan is through a secured loan. 

Financial lenders want to retain their low typical APR because this is the first and foremost way that they are compared with their competitors.  In order for them to be able to advertise their APR as, say, 6.9%, they must offer this rate to two thirds of their customers.  If very few people actually qualify for this rate due to imperfect credit ratings, instead of offering higher interest rates and compromising their low typical APR, large quantities of applications will be declined.  In fact, our research shows that over 85% of unsecured loan applications will be declined for this reason.  For this reason, if your credit rating is less than perfect, your best chance of securing an unsecured loan may be to apply to lenders whose typical APR is slightly higher than the most competitive rates, because the lending criteria regarding potential borrowers may not be so stringent. 

What to keep in mind about APR when searching for a loan

Some important things to keep in mind when comparing loan products based on APR include:
  • Consider the loan length you are being offered.  APR is figured annually, so the longer the loan length, the higher total loan cost you will pay.  Generally the best option is to repay the loan as quickly as possible, but shorter loan terms often equals a higher APR than the typical advertised rate.

  • Is the APR fixed or variable?  Most unsecured loans are offered as fixed rate loans, allowing you to control your budget as your repayments remain fixed for the duration of the loan.  Often secured loans are variable rate, following changes in the Bank of England base rate.  This allows you to take advantage of any interest rate drops during the loan term, but also means that your repayments will rise if the base rate goes up during the life of the loan.

  • Check carefully for any conditions associated with the loan.  Some financial institutions may offer a low introductory APR that then rises after a set time.  It is important to check what your total loan cost will be overall, as it may rise to a very high rate after the introductory period and you may find it cheaper to go with a slightly higher APR from the start in the interests of keeping your total loan cost as low as possible.

  • Always investigate charges for early settlement of the loan.  Some lenders offer special loan rates for flexible repayment products, so that the loan can be repaid early, and regular overpayments are able to be made.  These typically run at a higher APR; loans with low APR may often charge expensive fees for these options, so if these options are important to you, you may be better off going with a higher APR.

  • Some lenders offer optional payment breaks during the loan term, which can affect the APR offered.  If the chance to take payment holidays is important to you, loan products offering very low APRs may not include this option.  Also check if there are compulsory payment breaks at the start of the loan; this will add to your total loan cost as interest is usually charged from the start of the loan. 

  • Check out any insurance premiums included with the loan as whether or not they are included may alter the APR offered to you.

About the author: Barry Davis writes for Your Insurance Quote, a personal finance products comparison service. Some of the articles covered on his site are saving money guides covering topics such as insurance and loans.

Image license: Lusi; RGBStock royalty free license 

The new tighter rules for UK mortgage lending explained

Standard credit checks are a requirement for home loan applicants
Credit score affects mortgage outcome
By Lauren Sutton

Before the property market crashed towards the end of 2007, house values were skyrocketing. People seemed to be living the high life, making a fortune on their properties and spending more money than ever before. Of course, when the dream did fall to pieces around them, people put their houses on the market and tightened the purse strings. The result was house prices in free-fall, banks refusing to lend and everyone stuck in limbo for an indefinite amount of time.

Now, as the market starts to recover, the banks are being careful not to make the same mistakes as before and have cracked down on their lending habits. It is important to understand that there are still lots of mortgage lending options available from telephone mortgages through to fee free remortgages and more.

What went wrong?

Before the crash, companies were lending to almost everyone. This appeared to be brilliant for the economy and it seemed like everything was ticking along perfectly. The problems came when lenders started giving money to people who had no way of paying it back. Once the backlog started, it was a slippery slope down with a lot of people left out of pocket.

Housing mortgage
Loan affordability factors into mortgage application review

Banks started to collapse under the pressure and some big names nearly disappeared altogether. It was only through government bailouts that some of them managed to survive. Once this happened, the struggle began to pay back all the debts that had mounted up over the years. Consequently, the lenders cracked down on who they lent money to, as well as the amount they were prepared to lend.

What's changed?

Whereas in the past pretty much anyone could get a mortgage, there are now rules in place that prevent this from happening. Mortgages were being offered to people who hadn't had any background checks carried out on them, meaning you could borrow hundreds of thousands of pounds even if you already had huge debts.

This won't happen anymore, with the new rules stipulating that a borrower would be refused a loan if they failed a standard credit check. In an agreement made with the EU member states, here will also be a standard information sheet that explains to borrowers how to find the right mortgage for them. Many of the changes in the EU agreement won't have a huge impact on the UK system, as some of the new rules are already effectively in place in Britain anyway.

What can I borrow?

The new rules won't necessarily restrict you from borrowing; it may just make the whole process more clear-cut. People who clearly cannot afford the repayments are more likely to be refused for a mortgage or offered a much lower one. With this system, the people with bad credit are likely to have difficulty in getting a mortgage, but this could impact positively on borrowers who are deemed to be safer bets.

The lenders may gradually build up their confidence when they know that they're dealing with borrowers who can definitely afford to pay back their loans, making them more willing to lend more. It could be a slow process, but with the housing market strengthening every month, it seems to be heading in the right direction. The more responsible attitude to lending and borrowing may help to avoid another occurrence of the 2007 market crash from happening in the future.

About the author: This article, produced on behalf of Cambridge Building Society, was written by the UK-based journalist and (recent) first-time home-owner Lauren Sutton. Connect with the Cambridge team @cambridgebs on Twitter and Lauren on Google+.

* Image licenses: 1. Albion80; RGBStock.com royalty free license 2. Author owned and licensed 

Monday, July 22, 2013

Building the blocks of business credit

Business credibility is verified with an established financial history
Company registration with credit bureaus helps expedite business credit

Businesses seek a larger amount of funding from banks and financial institutions than do individuals, but Mashable.com warns that many institutions are wary of giving funds to a start-up company. The only way to get the loans to improve company growth is by building up your company’s credit history.

Get the company registered

Set up your business and get all of your tax documents together. When all of the paperwork is gathered, register the company with the major credit bureaus. Chron.com suggests the credit bureaus do not automatically add a business to their system when a company is formed. It is your responsibility to inform them and register with the appropriate business numbers that are provided after applying for state and federal taxes.

An Employer Identification Number, or EIN, is used instead of a Social Security Number when you register with the IRS and state or federal governments. It allows you to separate your business finance from your personal finance in the eyes of the government and with credit rating agencies.

The Small Business Administration suggests that you can get on the radar of the major credit bureaus by registering your company with Dun and Bradstreet to get a DUNS number. The company is the primary purveyor of business credit information for businesses, that can be used by banks and credit agencies.

Open a business checking and savings account

Applying for any form of credit requires a checking or savings account. USA Today suggests that you open both — the savings account provides collateral that can help you take out small loans and credit cards until your credit is established.

A DUNS number and the EIN number can be used to open a savings and checking account under the business name. Use the numbers so that you will not attach personal assets to the business assets.

Apply for credit cards

After your company is established and you’ve registered, getting a credit card is the next step to building your business credit. You can apply for an American Express business credit card or one from another reputable company. Even small banks offer credit cards, though they may not come with the perks offered by larger players.

As a general rule, credit cards are easier for start-up companies to obtain than loans because they do not require a certain time period to build up credit. KDriley.co.uk suggests that 65 percent of entrepreneurs use credit cards because they are fast and convenient when it comes to purchasing necessities. Use credit cards wisely so that you can repay the full amount each month. By repaying the full amount, you will limit your liability and prevent building up too much debt for your company to manage.

Establishing your credit as a company is different than working out the details of personal credit. Before you can start, register your company so that credit cards and bank accounts are separate from your personal accounts. Take out credit cards as a funding solution that allows you to establish a good credit history. Taking out larger loans is possible only after you get the company established.

Image license: MorgueFile; royalty and attribution free

Automatic renewal of fixed-term bonds slammed by U.K. FCA

After bond expiration lenders were renewing without direct order to do so
Fixed-term bond clauses may not be consumer friendly per the FCA

By Tim Capper

If you are using fixed-term bonds, you may want to take a moment to go back over the contract that you signed to see what sort of renewal clause you agreed to at the beginning. The U.K. Financial Conduct Authority or FCA has recently been reviewing a number of different firms, and it has not been giving a positive review to many of them due to these clauses. Some of the clauses were even deemed not to comply with Treating Customers Fairly (TCF) rules and regulations. To make sure that your money is being managed correctly, you should look over your own contract in the wake of these findings to make sure that it is fair.

Direct orders

One of the main problems the FCA found was that many firms were acting of their own accord when the bonds reached maturity, deciding what to do with the money on their own if they have not received direct orders from the owner already. When they should have been reaching out to the owner to find out what he or she wanted to happen with the money, they were just renewing the bonds or placing the money into other bonds without permission. They did not do this when standing orders said otherwise, but they should have consulted the owners, rather than automatically renewing the bonds.

Ambiguous wording

Another thing that the FCA found was that many of the contracts had very ambiguous wording that could be interpreted in a variety of ways. This gave the firm the power to do whatever it wanted, regardless of whether or not it was in the owner's best interests, and then say it had acted within the language of the contract. For instance, many contracts just stated that the firm would automatically renew the bond or place the money into whichever bond was deemed best at the time. The criteria for deciding which was 'best' was not established, so firms could really do anything that they wanted and then find a justification for it later. This was not language that would have tipped people off when reading the contracts in the first place, but it was very detrimental to the way that their funds were managed.

Introducing new clauses

Furthermore, some of the firms were actually going so far as to add these renewal clauses to the contracts that had already been signed. When you signed yours, there might not have been any sort of renewal clause at all, so you may not have been too worried. Have you checked it lately, though? They could have slipped one in during the life of the bond, making it look like you agreed to something that was not actually part of the original contract. If you do not have a copy yourself, though, how will you be able to prove it?  The firms were banking on customers just accepting that it must have been in there the whole time since it was on the most recent copy. Independant companies like Maple Leaf Financial, can check and investigate contracts on your behalf.

This practice clearly did not comply with TCF regulations and the FCA was outraged to see it happening. While other clauses were a sort of underhanded way to take advantage of customers, this practice was a clear, active way to alter contracts so that they were in the best interests of the firm, regardless of how unfair that was to the people who had signed the contracts.

Which firms were involved?

The names of the exact firms that were involved have not yet been released, but the FCA said that many of them - the list runs up over a dozen in total - were major players in the industry. Some of them could even be found on lists that promoted them as the best options of consumers. If you have a savings bond, even with a reputable firm that you thought you could trust, you may want to examine the language of the contract that you signed.

About the author: Tim Capper writes about financial products in plain english. The world has changed. People are waking up to what has happened here in the UK during the past 30 years.

Image license: Woodsy; RGBStock.com royalty free