Personal and Secured loans
Personal loans can be secured or unsecured.
Secured loan
You can only apply for a secured loan if you are a home owner, using your home as security. This means that if you get into difficulties repaying the loan, the lender could repossess your home and sell it to get their money back.
Personal loan
If you fail to pay the loan, the lender cannot repossess your home. Even so, you are legally obliged to pay back the loan as you agreed.
How do they work?
You borrow a fixed amount and usually have to repay it in fixed instalments over a set period (the term). The interest you pay is also usually fixed. Rates for secured loans are usually lower but there could be extra fees, and of course you could be putting your home at risk.
Important points to check
Charges for early repayment
Ask whether there are any penalties if you choose to pay the loan off early. For example, check how much interest you will be expected to pay with your final payment and any other charges that may be due.
Charges for late payments
Most lenders ask you to make your monthly payments by direct debit from your bank account. This way they’ll be sure to get their money on time. If you’re late with your payments you’ll be charged by your bank – find out from your bank how much the costs are.
Above information supplied courtesy of the FSA. For more information please visit http://www.fsa.gov.uk/
Mortgage types
You can choose to pay your mortgage back in the following ways:
• repayment;
• interest-only; or
• a combination of the two.
You'll need to decide which is best for you.
Repayment mortgages
Every month, your payments to the lender go towards reducing the amount you owe as well as paying the interest they charge. So each month you're paying off a small part of your mortgage.
The pros: It's a simple, clear approach - you can see your loan getting smaller.
The cons: In the early years your payments will be mainly interest, so if you want to repay the mortgage or move house in the early years, you'll find that the amount you owe won't have gone down by very much.
Interest-only mortgages
As the name suggests, your monthly payment only pays the interest charges on your loan - you're not actually reducing the loan itself. This is why it's very important you arrange some other way to repay the loan at the end of the term; for example, through an investment or savings plan.
If you choose this option you will need to check that your investment or savings plan grows accordingly, so that at the end of the term you'll have enough money to pay off the loan. If it doesn't grow as planned, you will have a shortfall and you'll need to think about ways of making this up.
The pros: Because you're only paying off the interest, and not the loan itself, your monthly payments will be lower.
The cons: That debt is not going to go away. Throughout the life of the mortgage, you'll need to check your investment or savings plan is on track to repay your loan at the end of the term.
If you can't repay it at the end of the term you could lose your home.
So, choosing a repayment or interest-only mortgage is one decision. The other will be to choose the interest-rate deal.
Above information supplied courtesy of the FSA. For more information please visit http://www.fsa.gov.uk/
Insurance types
What are pure protection and general insurance?
Pure protection insurance includes:
• term assurance (life insurance);
• critical illness insurance;
• income protection insurance; and
• payment protection insurance – includes elements of pure protection and general insurance.
General insurance includes:
• motor insurance;
• household insurance;
• some travel insurance (see below for travel insurance we do not regulate);
• health cover; and
• pet insurance.
Get the facts
Insurance differs in what it covers and what it doesn't (the exclusions). Read the policy summary that the insurance company will give you to find out exactly what you're getting and use it to shop around and compare other policies - see Getting help.
Whatever type of insurance you decide to take out, always:
• ensure the firm is authorised.
• disclose the full facts when applying for insurance – if you don't, you could invalidate your policy and the insurance company will not pay out in the event of a claim;
• read the policy summary for exclusions – to ensure that you choose the right policy for you; and
• shop around using the documents to ensure you get the best deal for you. Some policies might be cheaper than others, but they may not offer the same level of protection. Above information supplied courtesy of the FSA. For more information please visit http://www.fsa.gov.uk/
Savings products
The main types of saving products are:
• bank and building society savings accounts;
• National Savings and Investments; and
• credit union savings accounts.
In addition to regular savings accounts, you can also save in special Christmas savings accounts offered by some building societies and most credit unions.
Banks and building societies in the UK must be regulated to be able to take your money and hold it.
Savings accounts
Savings accounts generally pay higher interest rates than current accounts. You can find them at banks, building societies and through National Savings and Investments (NS&I). They are generally low-risk investments suitable for short to medium-term savings.
Savings accounts are deposit-based. This means you’ll usually get back the money you have put in plus interest, unless the bank or building society collapses. But if this happens, and as long as the firm is regulated by the FSA, the Financial Services Compensation Scheme may be able to pay compensation to customers, up to a set limit. Visit their website for more information.
Other ways to save
There are other ways to save for example, for specific items such as
• Christmas hampers; or
• Christmas gift vouchers.
You can also save in Christmas saving schemes and clubs run by supermarkets, large retailers, local shops, social clubs, pubs and workplaces. You usually save what you can, and then exchange your stamps or scheme for shopping, vouchers to spend, or you can buy other goods and services.
With these options you're not earning any interest on your savings so your money is not growing. You're also restricted to using the stamps for specific purchases depending on which type of shop you're saving with.
For more information get the OFT's Save Xmas – a quick guide to paying for Christmas leaflet.
Save regularly
You can ask your bank to arrange for a set amount of money to be paid regularly from your current account into a savings account — this method is usually called a standing order. You don’t have to save with the bank you have your current account with; you can shop around to find a bank with a better interest rate.
Is it right for you?
If you are saving for the short to medium–term, say under five years, or you want a low–risk home for your savings, consider savings accounts.
Bear in mind that, over the longer term, your money may lose its value because of inflation.
So, if you have decided a low–risk product is right for you, here are some questions to ask yourself:
• Can I manage my account online or by phone? If so, you may get a better interest rate.
• Is it likely I'll need to get at my money quickly? If so, stick to instant access or easy access products.
• If not, can I get a better interest rate if I tie up my money for a set term or have to give notice?
• Do I want a fixed interest rate or am I happy for it to vary?
• What is the best return I can get after deducting tax? Remember some products pay tax–free interest which boosts your return if you are normally a taxpayer.
• Is it absolutely essential that my original capital remains intact?
Top tips
Do use the FSA website Compare savings accounts tool to compare NS&I with similar deposit–based products from banks and building societies.
Do check how much notice you have to give to withdraw your money.
Above information supplied courtesy of the FSA. For more information please visit http://www.fsa.gov.uk/
Types of investments
You may have heard of all sorts of investments – ISAs, shares, property, unit trusts – the list goes on. However, the best way to understand investments is to think about investing as having three ‘layers’:
• The underlying investment itself will fall into what are referred to as asset classes. There are four main asset classes – shares, bonds, property and cash deposits. You can invest in each of these directly if you wish.
• Pooled investments. This is when you put your money with other investors to invest in one or more of the above asset classes. This spreads your risk and saves on costs. Open-ended investment funds, investment trusts and life assurance bonds are the most common pooled investments.
• Tax wrappers. These are tax breaks that you can – subject to certain rules – wrap around your investment, to shield it from either some or all tax. The wrapper can be around either the underlying investment or the pooled investment. The two most common tax wrappers are ISAs and pensions.
Above information supplied courtesy of the FSA. For more information please visit http://www.fsa.gov.uk/
Retirement options made clear
When you retire, you can usually take part of your pension fund as a tax-free lump sum. The remainder of your fund must be used to provide you with an income. If you have a money purchase pension, you can do this in various ways, for example using annuities or unsecured pension options. We explain briefly how they work and the things you need to consider before deciding which to choose. For more information get a free copy of the FSA Retirement options printed guide. You can download or order it online – see FSA Publications
If you're getting a pension from an occupational salary-related (defined benefit) pension scheme, your income in retirement is provided by your employer's pension scheme direct. So you don't need to make any of the retirement choices mentioned here. Talk to your pension scheme administrators for more information.
If you have a money purchase pension scheme (occupational defined contribution, a personal or stakeholder pension), this section is for you. For information on types of pensions – see
Pensions
For information about receiving your State pensions, see The Pension Service at Related links.
Retirement
Retirement means when you start to take benefits from your pension. You can usually do this from age 50, but the minimum age from which you can take your benefits is going up from 50 to 55 by 2010. The precise timing may vary between pension schemes, so check with your pension provider.
Flexible retirement
Since April 2006 retirement has become much more flexible than in the past. You have more options; for example, you can:
• delay buying an annuity;
• receive an income but continue to work, if your scheme rules let you; or
• work beyond normal retirement age if your scheme rules let you.
For more information get a free copy of our Pensions and Retiring soon booklets. You can download or order them online – see FSA Publications
Above information supplied courtesy of the FSA. For more information please visit http://www.fsa.gov.uk/