Loans Explained

Loans Explained

At first glance, a loan is an easily explained product; you borrow an agreed amount and you pay it back, plus interest, over an agreed period of time. But not all loans are suitable for everyone, so it is important to shop around to find the best one for you.

Both the amount you can borrow and the interest rate will depend on your circumstances and credit score.

 

Loan options

There are a number of loan options available, some of which may be more suitable to your needs, which include:

  • Personal Loans or Unsecured Loans
  • Secured Loans – The loan is secured against an asset
  • Business Loans
  • Car Loans
  • Short Term Loans
  • Mortgage
  • Guarantor Loans

 

How much can you borrow?

The amount of money you can borrow will depend on your circumstances and any existing debt you have. If you have credit facilities already available to you that you aren’t using, such as an overdraft or credit card, these can be taken into account too. Lenders want to be sure you won’t find yourself in unaffordable debt or unable to repay your loan.

Generally, the maximum you could borrow with an unsecured loan is £25,000. Any higher than that and lenders are likely to require the loan be “secured” against something, most commonly your house.

 

APR – How much will your loan cost

APR stands for annual percentage rate; this reflects the annual cost of borrowing.

A lender’s advertised rate, or their RAPR (representative annual percentage rate), only has to be offered to 51% of successful applicants, therefore you may not be eligible for this rate. You could be charged higher interests rates or your application may be rejected entirely. This is dependent on you credit score, your income and any outgoings you have. They may also use statistical data to see how borrowers in similar financial positions have behaved.

The APR attached to larger loans tend to be lower than that of smaller loans. You are likely to pay a higher rate of interest on a debt of just a couple of thousand pounds than you would on a debt of £7,000 or more. Because larger loans typically have lower APRs, you may be able to save money by consolidating your debt in order to get a better overall rate.

Be aware that some lenders charge upfront fees and possibly early redemption charges if you want to repay the debt early. Make sure understand what additional costs, if any, exist before you arrange the loan.

 

Alternative options for borrowing

  1. If you only need to borrow a small amount, then it might be worth considering some of the following alternatives, as a loan is not necessarily the best way for you to borrow the cash you need.
  2. If you are only looking for short-term credit and will be able to repay the amount within a few months, a credit card may be a better option for you (link to credit cards) Some offer 0% APR as an introductory offer so you could effectively borrow money with no initial interest changes, however bear in mind that they will likely have a higher interest than loans after that initial period.
  3. Consider using your savings.
  4. When borrowing small amounts, an arranged overdraft on your current account may work in your favour, as well as offering greater flexibility on when you repay. Be sure to check all charges associated with overdrafts and talk to your bank before spending more than you have in your account. Unauthorised overdrafts usually incur high charges.

 

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