Guide To Loans
Loans are issued by banks or other financial institutions. They allow for money to be borrowed over an agreed period of time and paid back in instalments. The amount borrowed attracts interest at an agreed rate over the loan period. This interest rate is normally expressed as an Annual Percentage Rate (APR).
Loans can be a convenient way to borrow money, but debt needs to be entered into and managed responsibly. Borrowers will need to pay back the original amount plus interest and any charges. It is important to evaluate the loan products available and make sure that the rate offered and terms of borrowing are suited to your individual circumstances.
An unsecured loan, sometimes known as a personal loan, is issued on the basis of the borrower’s creditworthiness and is not guaranteed by any type of collateral. The lender cannot take possession of a property, car or other personal belongings in the event that the debt cannot be re-paid.
Unsecured loans normally range in value between £1,000 to £25,000 and the interest rate and monthly payments are fixed during the term of the borrowing. A fixed rate and payment amounts can make it easier to budget, but borrowers need to be aware that some lenders will penalise customers who want to pay off their debt early. Some lenders will offer more flexible loans that allow for overpayments, so it is important to check the product information in detail before applying.
The rate offered on an unsecured loan will vary according to the loan market, the lender and the borrower’s credit rating. Those applying for an unsecured loan will not always be offered the rate that is advertised, as the amount that is borrowed and the applicant’s credit score can influence this.
For those wanting to borrow reasonably small amounts over short periods of time, unsecured borrowing can be a good option.
Secured loans, sometimes known as homeowner loans, offer homeowners a way of borrowing money and securing it against their property. Loans secured against a property that is owned outright with no mortgage are known as "First Charges"; loans secured against mortgaged property are known as "Second Charges".
Interest rates on secured borrowing can be much lower than on unsecured loans because lenders have the security of the property in the event that the borrower defaults on the loan.
Pay Day Loans:
Recent times have seen the launch of "pay day" loans. These loans typically carry extremely high interest rates and are designed to be used only over a very short term. Borrowers should only ever consider taking out a loan like this if they can be sure that they can pay it back quickly.
Which Loan Is Most Suitable?
Secured loans can be useful if the applicant requires a large sum or if they have special circumstances. For those who may have changed jobs close to the time of application, are self-employed or have a low credit rating, a secured loan might be the only option available.
For those seeking to borrow a relatively small amount, perhaps a few thousand pounds, a credit card could be a good alternative option. There are many credit card deals available that offer to lend money interest-free for a period two years or more.
If a longer repayment term is required, then unsecured loans may be a good option and applicants can usually borrow up to £25,000.
Things To Consider
Review the rates and repayment period carefully:
- If two loans have the same annual percentage rate but are repayable over different periods, the total cost of the loan will be different.
Make sure the repayments are affordable:
- The rate offered covers the cost of interest and any charges for borrowing, but borrowers need to be aware of the monthly payments that they will need to make.
Be Aware Of Charges:
- Check whether there is a charge for early repayment or any other charges.
Applying For a Loan
Lenders have to assess each individual applicant’s circumstances and credit history in order to decide whether to offer a loan and at what interest rate.
They ask for personal details such as address and bank details and will often perform a credit check to ascertain whether any bill payments have been missed, or any County Court Judgements (CCJs) have been recorded.
You can check your credit report here
To compare some of the best deals around, visit our loan comparison service today.