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Loans Guide

What is a Loan?

A Loan is an agreement between a lender (Bank, Building Society or other financial institution) and a borrower (You), where an agreed sum of money is "lent" by the lender to the borrower. There is an agreed percentage of interest added to the amount borrowed and the lender and the borrower agree payment terms over which the money and interest will be paid back by the borrower to the lender.

There are two Loan types:

  • Unsecured Personal Loans
  • Secured Loans

Unsecured Personal Loans

An Unsecured Personal Loan is a loan where the lender does not require any collateral or security to support the Loan. Most Unsecured Personal Loans have a fixed rate of interest. The lender looks at your personal circumstances (income, expenditure, ability to pay, etc.) and your credit history to decide if they will loan you the money.

In many cases a lender will also decide which rate of interest will be offered once they have assessed the personal circumstances. So don’t be surprised if you don’t get the rate advertised. Loans tend to be advertised using a "typical rate".

This type of loan can be used for any purpose.

Secured Loans

A Secured Loan is a Loan that is provided by a lender to a borrower where the lender will take "a charge" over an asset, normally a house, owned by the borrower. Secured Loans can have a fixed or variable rate of interest. If a borrower does not keep up the agreed payments the lender can force the sale of the asset to recover the money owed. So if you secure the Loan using your home, you risk losing your home.

The amount that can be borrowed, the terms available and the Annual Percentage Rate (APR) will depend on:

  • the value of your property
  • the equity in your property
  • your ability to repay the loan
  • your credit history

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Why Apply for a Loan...Secured or Unsecured?

Both Unsecured and Secured Loans offer a good way of paying for an expensive purchase like a car or to organise your debt. It lets you pay off a fixed amount per month over an agreed period of time.

You need to choose carefully, if you get it wrong you could end up paying more than you have to. It used to take a lot of effort to compare Loans but the internet has changed all that. There is now no excuse for paying more than you have to.

However, as always you have to check the terms and conditions within the agreement. Look out for early repayment fees, high administration fees and higher than expected interest rates.

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What is APR?

The Annual Percentage Rate (APR) indicates the interest rate applied to the Loan. In theory it allows you to compare Loans on a like for like basis. However approximately one third of applicants will either be refused a Loan or offered a Loan at a higher APR because they do not meet the lenders criteria.

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Flexible Features

Loans can come with a range of flexible features. These can include: being allowed to decide how much you pay back each month, the ability to make overpayments paying the debt back sooner or underpayments if your circumstances change. Some Loans will also allow the borrower to defer repayment or take payment holidays or withdraw money on a rolling basis up to a fixed borrowing limit. However, this flexibility may have an associated cost by way of a higher rate of interest.

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Payment Protection Insurance (PPI)?

When you apply for a Loan more often than not you will be offered Payment Protection Insurance known in the industry as PPI. It’s a common way that lenders use to increase the money they make from the "lending relationship". There are good reasons for taking out this type of insurance. It’s a policy that covers your Loan repayments if you are made redundant, have an accident, are unable to work due to serious illness or if you die.

On the other hand some providers of Payment Protection Insurance have been heavily criticised and fined by the Regulator recently. The Regulator decided that this type of product had been mis-sold by a number of large financial institutions.

It is really important to shop around for this type of insurance as both the costs involved and the cover they give you can vary widely. You also need to read and understand the terms and conditions that apply to the insurance:

  • What illnesses are covered?
  • Are there any restrictions on payment relating to redundancy?
  • When can you claim if your circumstances change?
  • Can you claim on this insurance? – The self-employed, students and contractors can’t.

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Consumer Protection

The Consumer Credit Act provides protection and entitles the borrower to certain rights. You must be given specific written information about the agreement, such as the APR, the total charged for the loan and you should be given a copy of your Loan Agreement also referred to as a Credit Agreement. Recent changes in the legislation mean that all Loan providers must give borrowers a "cooling off" period, usually 14 days, or the chance to pull out of the loan. A maximum Early Repayment Charge on a Secured Loan of 1 month’s interest has also been implemented.

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Why would you choose a Secured Loan?

Secured Loans allow an individual to borrow more and repay it over a longer period of time than an unsecured personal loan. The term can be as long as 25 years and the amount borrowed can be up to £100,000. They are available to borrower’s who are self-employed, have recently changed jobs or have had credit problems. Secured Loans can normally be used for any purpose.

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How can I find the best Secured Loan?

Finding the best Secured Loan for your situation can be complicated as there are many factors to be taken into account. The most important factor being that your home could be at risk if you cannot make the monthly payments.

The lender also has a lot to consider and you will not know the charges involved and the interest to be applied to the Loan until you have been assessed. The lender has to consider:

  • the value of your property
  • the equity in your property
  • your ability to repay the loan
  • your credit history

Secured Loan providers only advertise their "typical" rates and often have a wide range of products in order to suit the complex nature of this type of borrowing.

You will need to speak directly with the lender or to a Secured Loan Broker to find out what Secured Loans would be available to you given your circumstances. However, can get you started by showing you the best typical rates available and by putting you in touch with a broker who deals with a number of Secured Loan providers.

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