General Advice

Loans are an easy thing to get these days – and an easy way to get into debt. If used carefully, loans can help you realise your dreams but remember they are still debts themselves and need to be paid off. The Office of Fair Trading has additional detail and information on their web site and have a consumer information line on 08457 22 44 99.

A loan is for a fixed amount with a fixed repayment schedule


• You know what the repayments are and can budget accordingly and the APR may be lower. Banks generally attach various terms and conditions (covenants) to granting loans, which must be complied with throughout the term of the loan.
• Term loans are most suitable for funding fixed assets and core borrowing but not working capital. The term of the loan should not generally exceed the expected life of the asset it is financing.
• When the level of financing required is likely to go up and down it is important to choose a form of finance that does not require you to pay for funds you are not using.
• Although the interest rate may be slightly less than on an overdraft there is no opportunity to flex the amount of financing


Overdrafts are a flexible form of bank lending

• Should only be used to finance the short-term working capital requirements of your business.
• The key advantage of an overdraft is that you only pay for the funds you use.
• Typically the rate of interest will be between 3% and 7% over the bank’s base rate, depending on the level of risk
Calculating What You Will Repay
The general tendency is to look at the monthly amount, see if it can be afforded, sign up and take the money. What we should look do is look at how much we will be repaying back overall. We have to pay back the amount you borrowed AND interest.
A quick and simple way to find out the total cost of the loan is to take the monthly repayment amount and multiply it by the number of months the payment must be made. For example:
You owe £8,000 to various lenders. You take out a consolidation loan of £10,000 to pay these off and give you a little extra in case you need it. The terms of the loan were
Monthly repayment of £208.13 for 60 months. This equates to a total repayment of £12,480. You now owe £12,480 instead of the original £8,000 or the £10,000 you were borrowing.
By taking this loan you will have spent an extra £4,480 in 5 years time, on repayments

The most suitable financial package will depend on many factors, for example: what you need the money for, the kind of business you have and the market it operates within, your plans for the future and your ambitions for the business. Often the form of finance will be determined by what is available

The banks are the largest providers of loans and overdrafts in the UK and they will generally secure their loans and overdrafts against the assets of the business. The banks offer a number of ways to help you manage your cash flow and the costs associated with loans and overdrafts such as fixed interest rates, interest collars and interest caps.

The Small Firms Loan Guarantee Scheme guarantees loans from the banks and other financial institutions for small firms that have viable business proposals but who have tried and failed to get a conventional loan because of a lack of security.

Credit scoring

Before a lender will grant you credit they will check that you are an acceptable risk and that you are 'credit worthy'. To do this they will usually carry out a check with a Credit Reference Agency. These agencies hold information on their computers about nearly every adult in the UK and will provide a report and score to the lender outlining your credit history.

Most lenders now use some form of credit scoring to assess whether or not they are prepared to lend
Credit scoring takes into account
• current address
• your occupation
• whether you are a home owner
• whether or not you have a home telephone.


The total score determines whether the loan is granted or not. Different lenders use different systems and some will be more stringent than others. This means that you could be turned down by one lender and accepted by another. Lenders do not have to tell you the exact details of why they have turned you down but most should give you an indication.

Every time a potential lender carries out a credit search this is also registered with the credit-referencing agency. If you have applied for several loans over a fairly short period of time you could be harming your credit worthiness. Lenders will become concerned that you are either taking out several loans and overstretching yourself or that you have been declined several times by other lenders. This could mean that they will also decline you.

The Credit Reference Agencies do not offer an opinion on your credit worthiness and it is the lender who either approves or declines the loan based on the information provided. The type of information held would include details of previous credit agreements you have entered into and details of how these accounts were conducted. Any County Court Judgments registered against your name will be shown together with any mortgage arrears. Information will also show details of every person registered at a particular address and any credit problems they may have encountered.

Checking your credit score
There are three credit reference agencies, each of which may hold different information about you..
• Callcredit PLC
Consumer Services Team
PO Box 491 Leeds LS3 1WZ
Tel: 0870 060 1414

www.callcredit.plc.uk
• Equifax PLC
Dept 1EPO Box 3001
GLASGOW G81 2DT
Tel: 08705 143700
• Consumer Help Service
PO Box 8000 NOTTINGHAMNG1 5GX
Tel: 0870 241 6212
www.experian.co.uk

You may find it useful to obtain a copy of your file from each agency
You should receive a copy of your file within seven working days with a booklet explaining how to read your credit file and the information contained within it.

• Order your file online if you have either a credit card or debit card in your own name.
• Of write enclosing a cheque for £2 (made payable to Callcredit, Equifax or Experian), giving your full name, date of birth, current address and any addresses you have had in the last six years (this helps the agency to track all the information it has on you). If you run a business, give its name and address as well, because separate information could be held on you under your business. If you've changed your name in the last six years, please provide those details too


* Check your credit report regularly from one of the three major institutions. This will give you a guide to details that allow you to detect possible fraudulent activity with your credit card account

The Office of the Data Protection Commissioner has responsibility for credit reference agencies and produces a leaflet entitled 'No credit?' This gives advice on how to consult your credit record and rectify any mistakes. You can order a copy of it by calling 0870 44 21 211.


Correcting Your Credit File If It Is Wrong
If you think that any of the information you have been sent by the credit reference agency is wrong, you can ask for it to be corrected or removed from the file. You need to write to the agency telling them what you want them to do. You should explain why you think the information is wrong.
If you write to the agency in this way, they have to reply within 28 days. Their answer will tell you whether they have corrected the information, removed it from their file or done nothing. If the file has been corrected, you will get a copy of the entry. If the reply states that the agency has done nothing or if the information is corrected but you remain unhappy with the correction you can write your own note of correction (no more than 200 words) clearly explaining why you think the information is wrong and ask for it to be included on the file.
If the credit reference agency has not written to you within 28 days or has refused to add your note of correction, you can appeal to the Information Commissioner. If you want to do this, you will have to write to:
The Information Commissioner Wickliffe House, Water Lane Wilmslow Cheshire. SK9 5AF
When you write, you must give the following details:
a) Your full name and address
b) Name and address of credit reference agency
c) Copy of the note of correction
d) Details of the information you think is wrong including:
• Why you think it is wrong
• Why you think you are likely to suffer because it is wrong
• The date when you send the note of correction

 

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