Loans

Loans are one of the more common forms of credit available and are a popular means of paying for many high-value goods, such as a new car or home improvements.

For many people, loans are a useful form of credit which can enable them to purchase high-value products or make improvements which can improve the value of their property.

For other people, loans can be a means of consolidating multiple debts into one, simple monthly payment, making it easier to plan your finances and keep control of your debt situation.

Topics covered in this article:

• Why are loans useful?
• There seems to be a number of loans available, what is the difference between them?
• Why can loans become a debt solution?
• Loans: Secured vs Unsecured

Why are loans useful?

Due to the number of lenders offering loans of various values at various rates, it is possible to borrow large amounts of cash relatively inexpensively compared to other forms of credit, such as credit cards or hire purchases and, whilst considered a short term debt in comparison with a mortgage, repayments can be made over a much longer period of time in comparison alternative credit sources.

In addition to making large purchases, there is a growing trend for people using loans to pay off many of their current debts and consolidating their monthly outgoings into one manageable repayment.

There seems to be a number of loans available, what is the difference between them?

Loans can generally be categorised into two forms; secured loans and unsecured loans.

Unsecured, or personal, loans are not secured against any assets or property that you own and are often a cheaper way of borrowing money compared to a secured loan, which is secured against property in the event of non-payment. Whether you are able to borrow a secured or unsecured loan is usually dependent on your credit history.

When taking out a loan, it is also important to consider the Annual Percentage Rate (APR), which dictates the rate of interest that is applied. This usually remains fixed throughout the life of the agreement although some loans do come with a variable rate.

Why can loans become a debt solution?

Whilst taking on more debt to repay debt seems like an unusual concept, many people are now finding that taking out a loan to pay-off their existing debts can help their current financial situation.

By paying-off any existing debts, such as credit cards, store cards or other loans, borrowers can combine what may be multiple bills into one, manageable repayment. Often, this monthly repayment could be substantially lower than your current outgoing, although it is likely that you would repay more over the lifetime of the loan than you otherwise may have done.

Secured Loans and Unsecured Loans

When applying for a loan, you are likely to be presented with two options; secured and unsecured.

As the name suggests, the most overt difference between the two is that a secured loan is secured against an asset of the borrower in the event that they are unable to make the necessary repayments. This is usually the borrower's home and as a result, secured loans are only available to home owners.

Unsecured loans on the other hand, are not secured against any property or asset and, whilst they are the most common form of loan offered by the mainstream banks and building societies, they are not available to all customers. Effectively, because the lender has no security, unsecured loans tend to be reserved for customers with good credit scores as it reduces their risk profile.

It is possible for a lender to repossess your home for failing to keep up with repayments on an unsecured loan with a 'court charging order', although these are very complicated to obtain and as a result, used only as a last resort.

There are other differences however between secured and unsecured loan and they could affect how much you can borrow, how long you can borrow for and, ultimately, the overall cost of the loan.

Because of the increased security that a secured loan can provide a lender, both the amount and length of the loan can be significantly larger than a typical unsecured loan.

Usually, unsecured loans will allow you to borrow a maximum of £25,000 over a period of up to seven years. Secured loans on the other hand, allow borrowers to potentially borrow £75,000 for up to 20 years.

Of course, borrowing other a longer period will result in paying considerably more in interest, so consider the length of your loan carefully. A loan of £15,000 at 10% paid over 10 years (monthly payments of £198.23) would generate £8,787.13 in interest and result in you repaying at total of £23,787.13.

Extend that same loan over 20 years and the amount of interest comes to £19,740.78, resulting in a total amount repayable of £34,740.78 at £144.75 per month.

Another notable difference with secured loans is that, unlike unsecured loans which are fixed rate, the APR is variable, rising and falling based on the Bank of England base rate. This means that your monthly repayments could increase should the rate of interest increase.

Secured loans also tend to be less flexible. With an unsecured loan, it is relatively easy to make early repayments should you choose to yet with secured loans, there are often penalties for making early repayments, known as redemption penalties.

Can I Get a Loan with a CCJ or Other Credit Problems

Lenders will have their own criteria for lending but as a general rule, you will find it more difficult to get a loan if you have a CCJ or a history of other debt problems. This is because a lender is likely to view you as a higher risk.

Applying for a loan with a CCJ to your name is also likely to effect the level of interest that you may be charged.

Source: www.debt-free.org.uk