Pitfalls of Personal Loans of Last Resort

For People With a Low Credit Score Why Pay a Credit Broker?

Feb 28, 2009

For people struggling to keep pace with a deteriorating financial situation the temptation to apply for a personal loan of last resort can be irresistible.

In the UK, and presumably elsewhere in the world, there are companies which are in business to sell financial products, which may be totally unsuitable, for people with a low credit score and whose life has been blighted by personal debt.

Personal Debt Solutions

Many of these organisations run powerful and seductive marketing campaigns in newspapers, magazines and as more people look on-line for personal debt solutions their adverts appear on the first page of all the major search engines.

On the surface it’s difficult to distinguish these companies, which offer a reasonable,’ typical’ APR on “unsecured loans, bad credit no problem” from the many other reputable lending organisations out there.

Credit Broker

The first point to check is, are they credit brokers or do they actually lend the money. It should say somewhere on the website. A credit broker will act as a go-between someone looking for a loan or mortgage and lenders and may charge for this service.

The companies discussed here are brokers and as such source loans from lenders which generally charge very high levels of interest, perhaps up to 50% APR, a figure far removed from the one used in the advertising.

Administration Fee

These companies make money from consumers by charging an administration fee, normally around £50, for their services. Many borrowers however are unaware at this stage that the company is a broker and not a lender and the confusion is made worse when they are told by, lets call them XYZ company, that they have been accepted for a loan.

What this simply means is that XYZ have accepted them as a client to broker a deal for them with another financial institution. It doesn’t mean the borrower has been offered a loan. At this stage people will have parted with their £50. Typically loan application paperwork from lenders, many charging high interest rates, will follow over the following weeks.

It is at this stage most people will realise that it’s not quite what they thought it was. Some will continue with the process and some will back out and face the daunting prospect of getting their money back. XYZ are legally entitled to a very small part (£5) of the administration fee but the balance must be returned.

There is considerable evidence from on-line forums that this is a difficult process and many people have had to seek help from the UK Trading Standards Institute or through the Small Claims Court.

Personal Loan

It’s important to note that there are many reputable brokers out there but why would anyone searching for a personal loan need use a broker? It is entirely possible for anyone looking for a loan to complete the process themselves without charge.

The advice from a number of financial experts is to research, research and research. If XYZ company looks good but its not a well-known name check it out on-line, there are for example many forums dedicated to financial matters and someone somewhere will have dealt with XYZ before.

For people looking for objective, free and independent personal debt advice why not look at the advice from the sources listed below before applying for that loan of last resort.

This information is obtained from the reputable sources listed below but is not offered as financial advice.

The copyright of the article Pitfalls of Personal Loans of Last Resort in Personal Debt Management is owned by Neil Gunn. Permission to republish Pitfalls of Personal Loans of Last Resort in print or online must be granted by the author in writing.