The Essentials to Consider When Taking Out a Loan
If you need to borrow money for any number of things, then a loan could be for you. A loan is an arrangement in which a lender gives money to a borrower, and the borrower agrees to repay the money, plus interest, in the future.
The interest rate applied is known as the Annual Percentage Rate (APR), and when choosing a loan you should compare the APRs of different products as a means of determining how competitive they really are. The main types of loan are secured or home owner loans, and unsecured or personal loans.
Secured Loans
A secured loan requires the borrower to put up some kind of security for the money, normally their property which is why secured loans are often called home owner loans. It means that the lender has the right to take ownership of the asset if you fail to make the repayments that are due under your loan agreement.
A secured loan generally comes with a lower interest rate than an unsecured loan as, from the lender's point of view, the risk of defaulting is lower. However you could lose your house if you fail to keep up with repayments.
If you put your house up as surety for your loan you can normally borrow up to £100,000 and pay it back in anything from three to 25 years in monthly instalments. You may be charged a penalty if you repay your loan earlier than agreed, and you should check each lender's individual policy.
Unsecured Loans
If you opt for an unsecured loan then you do not have to put anything up as security, but the interest rate you pay will be higher and the amount of time over which you repay the loan shorter. Unsecured loans are quick to arrange and are less risky as you will not lose your home if you are unable to repay the loan.
Lenders will take your income, credit history and personal circumstances into consideration when deciding if they will give you a loan, how much they will lend you, at what rate and over what term.
If you want to repay your loan earlier than agreed at the outset, there could be an early repayment charge so check this with your lender before you sign up.
As with mortgages, interest rates may be fixed or variable for the term of the loan. If the rate is fixed, then it is easier for you to budget as you will repay the same amount each month for the term of the loan. A fixed rate will protect you from rises in interest rates, but they will also prevent you from taking advantage if rates fall. If you have a variable rate loan then the interest rate you pay will go up and down as interest rates change.
If you are thinking of taking out a loan it is a good idea to shop around and get independent advice about the best loan for you.
