Borrowing money ought to be a simple and straightforward process. And by and large it is provided you know what type of loan best suits the situation and requirements that you have.Loans Explained
Essentially there are two basic types of loan - secured and unsecured.
A secured loan is one where money is granted against the security pledge of an asset with value. The most common form of secured loan is a mortgage where the property or land being purchased is sued as collateral. Other forms of secured loan can also be available but there is always the pledge of some physical asset as security in the event that the borrower fails to make payments on time. The risk with secured loans is that the property may be seized in the event of a default and sold to realise enough money to pay off the loan.
Unsecured loans are grants of money against the promise to repay. There is no pledge of asset as security but a young borrower or one with a poor or weak credit history may be asked to find a guarantor to stand liable for the loan in their place should they default.
Secured loans tend to be more expensive to set up and involve valuation fees and registration charges. For that reason they tend to be used for larger value loans (over £15,000) and be repayable over longer periods (typically 5 years or more). Since secured loans offer a lender greater protection in the event of default the interest rate charged can be very attractive compared to an unsecured loan.
But by far the most common loans for everyday purposes are unsecured loans. Usually these are fixed rate, fixed term loans where the payment is calculated ate a given interest rate at the start and does not change.
Loans where the interest rate varies with market rates tend to be linked to longer term lending or very large short term loans. With these there is usually a fixed capital payment designed to pay off the loan balance in a set period (say 10 years) and a variable amount that equates to the interest charged on the loan balance for the period. Some mortgage loans use a highbred version of this where the interest rate is fixed each year and then any adjustment made at the end of the year to the loan balance owed.
Variable rate loans can also be flexed in repayment term to match a fixed monthly payment amount. This means that the borrower agrees to make a set payment each month and the loan company charge interest at the current rates and use any surplus to pay off the capital. If interest rates rise this can lead to the loan balance actually growing if the payment is not sufficient to cover the monthly interest charge. Interest element of the payment is large at the start of the loan due to the balance owed - this drops as the loan nears completion so more of the payment is used to pay off capital.
A fairly recent innovation has been the arrival of payday loans. These are advances of relatively small amounts (up to £1,000) for a matter of days and are designed to fill a short term cashflow need until the next payday. These are very quick to arrange and with funds available in a matter of minutes with cash deposited straight to the borrowers bank account. Loans are available for up to 30 days but can be extended. Most payday loan sites come with loans calculator functionality so the total cost of borrowing can be easily seen.
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