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Everything Personal Finance

Loan Basics

A loan is a way to spread the cost of a major outlay such as a new car, an extension or other home improvements, a wedding, education, debt consolidation, or even a once-in-a-lifetime holiday. There are several types of loans which are explained briefly below.

Personal Loan

This is also known as an unsecured loan and is available from many financial institutions such as banks and building societies. You decide how much you want to borrow and the length of the loan whilst the lender decides whether or not to accept you as a customer based on your credit score. These loans do not require that your property be used as security and are generally used for amounts between £1,000 and £25,000 over a term of 1 to 5 years. Upon agreement you then make regular monthly payments until the loan plus interest at the agreed rate has been paid. These loans are one of the most common types and can be found online from places such as loanable.

Secured Loan

This loan uses your property as security against the loan and are, of course, only available to homeowners with positive equity. Home loss could occur should you default on your repayments. Amounts up to £100,000 are possible and repayment usually occurs over a 25 year period. Repayment will usually involve fixed monthly amounts and are generally fixed at a lower APR than Personal or Unsecured Loans.

Although the term describing the loan may differ (such as car loans, peer-to-peer loan, home improvement loan, etc) they are all simply other terms for either a Personal Loan or a Secured Loan.

When deciding the loan to accept, the most important deciding factor is the interest rate. Other factors to consider are arrangement fees, early repayment fees, repayment holiday at the start of the loan and flexibility. Qualifying for a loan at a competitive interest rate will depend upon your credit score.

All loans, by law, have to declare their representative Annual Percentage Rate (APR). There is no guarantee that you will be accepted at their advertised rate but the lender must apply the rate to at least 51% of their borrowers. Those with a poor credit score may still be offered a loan but probably at a higher APR.

Mortgages

A legal agreement by which a bank, building society, etc. lends money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of the debt.

Payday Loans

A relatively small amount of money lent at a high rate of interest on the agreement that it will be repaid when the borrower receives their next wages.