The world of finance can be very confusing indeed, and if not approached properly very expensive too for consumers who haven't done their homework. If you're looking to secure some finance to help you with your latest project, it's important that you consider the different finance options in order to choose the most suitable for you.
Types of loan
There are now many different methods of lending money, but they basically boil down to two distinct types:
- Secured Loans You can generally borrow £5,000-£125,000 with a secured loan- for up to a 25 year period. The finance is secured against a property or asset, which is jeopardised if you cannot make the repayments.
- Unsecured/Personal Loans Unsecured and Personal loans are one of the same thing. You don't need to be a property owner to apply, as your eligibility is decided by your current financial situation and credit history. Lending amounts are much lower though, with most lenders only willing to go as high as £25,000; and over a 10 year period.
Advantages and Disadvantages of Secured LoansSecured loans allow you to borrow much more than you could hope for with a personal loan, but your viability as a customer will still be determined by your current situation, credit history and property value. As a result you may not be able to borrow as much as you'd intended, - or at least not at the APR rate you had seen advertised, as interest is also variable by applicant.
As you can take out a secured loan over a period of 25 years, you can spread the repayments out over a longer period than you could with a personal loan, thus making it more manageable if you run into financial difficulty. That reduced risk comes at a price though, as it's likely that you'll also end up paying more in interest.
If you've been refused for a personal loan, securing a loan against your house is a more likely way for you to obtain finance, but you should be aware that you run the risk of losing your property if you don't take proper precautions.
Advantages and Disadvantages of Unsecured Loans
You can borrow much less and over a shorter time period, but unsecured loans carry less risk in that there is no property or asset on the line if things go wrong. If you have a poor credit rating (or no credit score), you'll find it difficult to obtain a personal loan, but you may have more luck securing the money by applying for an unsecured loan with a 'guarantor'.
Some providers offer deferment and 'holiday breaks' for repayments, which can help to give you a breather if money gets tight, but you should beware that interest will still continue to accrue during the holiday periods, and you'll end up paying more interest that originally agreed.
As with secured loans, APR rates will be variable by applicant. As a general rule of thumb, interest rates for personal loans are higher than secured loans – but not by much; you can often find rates ranging from 6%-13%
Alternatives to secured and unsecured loans
A better option which might be available to you, is that of re-mortgaging your home, as interest rates are generally lower than secured loans. It could be that you'll end up paying interest on the sum for the remainder of your mortgage period, but on the other-hand; this also allows you to make the repayments more manageable by spreading them out over a longer period.
If you just require to borrow a small amount - a few thousand say – you'll be interested to know that some credit card companies offer 0% interest on purchases for 18 months, which will work out far better than any loan you can find, assuming that you can pay of the balance within a year and half.Image: © John Takai | Dreamstime.com