Confused about loans? It's crucial that you understand what you're getting yourself into before taking the plunge, as the loan you require will depend on your circumstance. We've compiled an easy-to-follow breakdown to get you on your way
Types of loan
Loans can be classified into three basic types:
- Personal loans/unsecured loans These types of loan are based on your credit rating alone. Generally you can borrow up to £25,000, with a maximum payback period of 10 years
- Secured Loans Are provisioned out against the security of a property, meaning failure to make the repayments could result in loss of the property. You can often borrow up to £100,000 over a maximum period of 25 years with secured loans
- Consolidation Loans Are intended to help you manage several smaller debts, by taking out one single loan to (ideally) reduce the monthly repayments, and reduce the interest. These are popular for those which have several credit or store cards which often have much higher rates of interest during repayment.
There are many sources available for borrowing money. Some are of course more reputable than others- with 'payday' loan providers among the most nefarious; clearly looking to capitalise on the vulnerable and entangle them in a web of debt.
Some of the most common (and perhaps more trustworthy) lenders include:
- Banks/Building societies
- High street stores
- Internet only based loan providers
If you're considering a loan, make sure to do your homework as to what's available to you. Remember; internet comparison sites provide the perfect tool for scrutinising different providers at a glance.
What else do I need to consider?
First of all, you're going to need to calculate how much you can pay back monthly and try to find a repayment length (i.e how many years), that allows you to not overstretch your finances. Aside from that, you're going to need to look at the typical APR rate, and the total interest owed for repayment of the money. If you're consolidating current debts, it's important that the APR is less than that if you were to just continue paying off your credit cards etc. directly. You don't have to be good at maths to accomplish this, as a quick search on google will bring up many free online APR calculators which will work this out for you, once you've entered the relevant data.
Some providers offer a deferred repayment date which may be useful if you need extra breathing space to straighten your finances. This can generally be anything up to 12 months, depending on the supplier.
Finally, check for any 'redemption fee' applicable, which is technically a financial penalty, should you wish to pay back the loan early.Image: © Stephanie Berg | Dreamstime.com