A Quick and Easy Guide to Loans From Someone Who Doesn"t Really Like Loans
A loan is a financial transaction between a lender and a borrower.
The agreement is made on a specific amount of money that must be paid back in full, within a certain amount of time.
The specific terms of the loan will be set out in a contract and this will usually include interest and the interest rate (additional to the principal amount), administration charges and penalties for missed/ late payments.
These terms must be agreed by the borrower prior to the money being exchanged.
The payment date and amounts will also be stipulated at this stage.
There is a huge range of different types of loans and lenders will vary the terms and conditions a great deal.
However, there are two main types of loan; these being secured and unsecured.
A secured loan is where the borrower will agree to secure the agreement with an asset such as a house or car.
In the event that the borrower fails to agree to the terms of the contractual agreement in the loan by defaulting, the lender may then take the collateral and sell it to ensure they receive their money.
A lender may be willing to lend a much higher amount if the loan is secured as this reduces financial risk.
It may also be beneficial for the borrower as they may receive more favourable terms in the contract as their loan is secured by their property.
An example of a secured loan is a mortgage, the collateral being the house.
In an unsecured loan there is no financial security for the lender, they go on the promise of the borrower and the contractual agreement.
In the event of breaking the agreement the creditor has nothing to secure their money with.
Again, with an unsecured loan the terms may be less favourable to the borrower, such as a high interest rate.
An example of an unsecured loan could be a personal loan.
When trying to obtain an unsecured loan the lender will need to go on an individual's credit rating and income in order to make a decision.
This may result in unsecured loans being harder to obtain than a secured loan.
Before taking out a loan it is important to remember these tips: -Research the market, there are so many loans available.
Make sure you spend some time comparing the different APR (Annual percentage rate), TAR (total amount payable) and length of the loan.
You ideally need the lowest interest rate and lowest total amount payable, with monthly payments being realistic for your means, over as short a length as possible.
When researching the market bear in mind, the more applications you make for loans the more your credit rating will get checked, and surprisingly this will then reduce your credit rating.
So be careful and don't apply until you are sure it is right for you.
-Check the small print! In the terms and conditions it will state what the penalty would be for a late or missed payment, which is worth knowing.
You should also check to see if you incur a penalty for paying off early, if you do incur a charge then you may not benefit from paying the debt off early.
-Check the type of rate, it is well worth fixing the interest rate to help you budget and ensure you can make the repayments.
These will be set the same on a monthly basis, (fixed rate) rather than varying, (variable rate).
The interest rate for your loan will establish how much you pay back in total.
If the interest rate is fixed for the lifetime of the loan then you will know how much you will be paying in interest.
For example where borrowing £1000 with a 10% interest rate, you will pay back £1100, plus any additional administration or late payment charges.
Interest rates are governed by the bank of England and they are a way of helping to keep the economy stable, rising if inflation is too high and lowering to increase spending and the economy.
With a variable rate you may be taking a risk, depending on what is happening with the economy and what will happen for the duration of your loan.
People consider loans for different reasons, one being to consolidate their debts.
To consolidate your debts you may benefit by having a reduced interest rate, organising your finances and having one monthly payment that may be lower than existing multiple payments to different creditors.
Again stick to the points above to ensure you choose the right loan.
Also be aware of early settlement penalties with existing creditors.
Once you have decided that you want to go ahead with the loan you will need to apply either online, or in person for example in a bank.
If you have poor credit history then you may be able to apply for a bad credit history loan, however the amount you can borrow will usually be smaller and the interest rate higher.
To increase your credit history, you need to manage your money by not getting into debt and making missed payments on existing loans.
You also need to have a credit history by having had credit previously, for example a credit card or hire purchase agreement.
You should only borrow the amount that you need and speak to your lender should you get into any financial difficulties.
Before you make a missed payment you can contact your creditor to re-arrange a payment date.
If you find that you are struggling to meet your monthly payments you may be able to increase the term period of the loan and therefore reducing your monthly payments.
The agreement is made on a specific amount of money that must be paid back in full, within a certain amount of time.
The specific terms of the loan will be set out in a contract and this will usually include interest and the interest rate (additional to the principal amount), administration charges and penalties for missed/ late payments.
These terms must be agreed by the borrower prior to the money being exchanged.
The payment date and amounts will also be stipulated at this stage.
There is a huge range of different types of loans and lenders will vary the terms and conditions a great deal.
However, there are two main types of loan; these being secured and unsecured.
A secured loan is where the borrower will agree to secure the agreement with an asset such as a house or car.
In the event that the borrower fails to agree to the terms of the contractual agreement in the loan by defaulting, the lender may then take the collateral and sell it to ensure they receive their money.
A lender may be willing to lend a much higher amount if the loan is secured as this reduces financial risk.
It may also be beneficial for the borrower as they may receive more favourable terms in the contract as their loan is secured by their property.
An example of a secured loan is a mortgage, the collateral being the house.
In an unsecured loan there is no financial security for the lender, they go on the promise of the borrower and the contractual agreement.
In the event of breaking the agreement the creditor has nothing to secure their money with.
Again, with an unsecured loan the terms may be less favourable to the borrower, such as a high interest rate.
An example of an unsecured loan could be a personal loan.
When trying to obtain an unsecured loan the lender will need to go on an individual's credit rating and income in order to make a decision.
This may result in unsecured loans being harder to obtain than a secured loan.
Before taking out a loan it is important to remember these tips: -Research the market, there are so many loans available.
Make sure you spend some time comparing the different APR (Annual percentage rate), TAR (total amount payable) and length of the loan.
You ideally need the lowest interest rate and lowest total amount payable, with monthly payments being realistic for your means, over as short a length as possible.
When researching the market bear in mind, the more applications you make for loans the more your credit rating will get checked, and surprisingly this will then reduce your credit rating.
So be careful and don't apply until you are sure it is right for you.
-Check the small print! In the terms and conditions it will state what the penalty would be for a late or missed payment, which is worth knowing.
You should also check to see if you incur a penalty for paying off early, if you do incur a charge then you may not benefit from paying the debt off early.
-Check the type of rate, it is well worth fixing the interest rate to help you budget and ensure you can make the repayments.
These will be set the same on a monthly basis, (fixed rate) rather than varying, (variable rate).
The interest rate for your loan will establish how much you pay back in total.
If the interest rate is fixed for the lifetime of the loan then you will know how much you will be paying in interest.
For example where borrowing £1000 with a 10% interest rate, you will pay back £1100, plus any additional administration or late payment charges.
Interest rates are governed by the bank of England and they are a way of helping to keep the economy stable, rising if inflation is too high and lowering to increase spending and the economy.
With a variable rate you may be taking a risk, depending on what is happening with the economy and what will happen for the duration of your loan.
People consider loans for different reasons, one being to consolidate their debts.
To consolidate your debts you may benefit by having a reduced interest rate, organising your finances and having one monthly payment that may be lower than existing multiple payments to different creditors.
Again stick to the points above to ensure you choose the right loan.
Also be aware of early settlement penalties with existing creditors.
Once you have decided that you want to go ahead with the loan you will need to apply either online, or in person for example in a bank.
If you have poor credit history then you may be able to apply for a bad credit history loan, however the amount you can borrow will usually be smaller and the interest rate higher.
To increase your credit history, you need to manage your money by not getting into debt and making missed payments on existing loans.
You also need to have a credit history by having had credit previously, for example a credit card or hire purchase agreement.
You should only borrow the amount that you need and speak to your lender should you get into any financial difficulties.
Before you make a missed payment you can contact your creditor to re-arrange a payment date.
If you find that you are struggling to meet your monthly payments you may be able to increase the term period of the loan and therefore reducing your monthly payments.