LOANS The information contained in this document is for informational purposes only. The purpose of documents such as this is to promote general understanding and knowledge of various welfare topics. It is not intended to be a substitute for professional advice, diagnosis or treatment and
Sometimes you might need to borrow money. This could be a short term solution for unexpected bills (e.g. to pay for a boiler repair), or could be a much larger amount of money to pay for something such as a house or car. When someone lends you money that you need to pay back, this is called a loan. The aim of this guide is to inform you about the different types of loans, and the advantages and disadvantages of these. Secured and Unsecured (1) Broadly, loans fall into the category of secured or unsecured. Secured- A secured loan is where you borrow money against your possessions (usually your house). This means that if you are unable to pay this loan back, the lender can claim your possessions instead. These usually have lower interest rates, but are much riskier as you could end up losing your home if you cannot pay. Examples of secured loans include: Second mortgages Debt consolidation loans Home equity loans Unsecured- An unsecured loan is where you borrow money from a lender, and make regular payments until the loan is paid off. The interest rates for these tend to be higher than for unsecured loans, but the risk is smaller. If you don t pay your unsecured loan, you could be subject to fines or charges. Interest (2) When you take out a loan, you will be charged interest on this loan. This is how the lender makes a profit on lending you the money. Interest rates will vary from lender to lender, and you should always shop around to make sure that you are getting the best deal. The interest charge advertised describes the cost to borrow the money over the period of a year. For example: If you borrow 100 at 10% interest, the interest charge for the loan over a year would be 10. If you paid the loan back over 6 months, you would only have to pay 5 interest.
Interest rates can be fixed or variable. If they are variable, they might change throughout the duration of your loan. Personal Loans A personal loan is a loan which is not secured against any of your possessions. You might take this out from a bank, or from someone else. Personal loans are unsecured and you can borrow up to 35000. You will usually pay back a fixed amount of money, and the interest will also usually be fixed. The length of repayment is often set by yourself and your lender, but the longer the loan, the more interest you will have to pay. Mortgages (3) A mortgage is a large loan that you might take out so that you can buy land or property. These loans are usually taken out over a long period of time (e.g. 25 years), however the duration of your mortgage can be agreed by yourself and your bank. Mortgages are an example of a secured loan- if you cannot pay your mortgage, the lender can take your home from you. The main types of mortgage are: Repayment- if you take out a repayment mortgage, you pay off the amount that you borrowed, along with the interest on this amount. You will usually do this monthly. By the end of your mortgage, you should have paid off all of the money that you borrowed, and all of the interest. Interest only- if you take out an interest only mortgage, you don t pay off any of the amount that you borrowed, and you will only pay off the interest. What this means is that at the end of your mortgage, you will need to be able to pay the lender the amount that you borrowed from them. This is probably only an option for you if you know that you are coming into a large amount of money. For more information on mortgages, please we have a help guide on this topic.
Payday Loans (4) Payday loans are loans which you will usually take out over a short period of time. They are named after the fact that the loan is intended to be paid back when you get paid. Payday loans are paid straight into your bank account, and it is often easy to get money on the same day as you apply. On the agreed pay back date, the money comes straight out of your bank account. You should be extremely careful before considering taking out a payday loan. Because the money comes straight out of your bank account on a set date, you may be left without enough money to pay other bills. Interest rates on these loans are very high. If you can t pay back the loan on time, you may face very high charges. New rules for payday loans do mean that you should never pay back more than twice the amount that you borrowed. Pawnbrokers (5) Pawnbrokers are often much less expensive than payday loans, but still more expensive than taking out a personal loan. When you go to a pawnbroker, you give them something valuable that you own. They will then give you a loan, and a ticket for your item. When you pay the loan back in full, you will get your valuable back. If you cannot repay the loan, the pawnbroker can sell your valuable. These loans are good if you have a poor credit rating, as no credit checks are required. Peer to Peer Lending (6) The idea with peer to peer lending is that if you need to borrow money, a company will put you in touch with someone who will lend it to you. If you have a good credit score then these loans can be cheaper than bank loans, but if you have a bad credit score they can be much more expensive. It is important to note that you will probably be charged a fee for applying for the loan, even if you are rejected. You will then need to repay the fee if you want to reapply.
Bibliography 1. The Money Advice Service. Secured and unsecured borrowing explained. The Money Advice Service. [Online] [Cited: October 5, 2015.] https://www.moneyadviceservice.org.uk/en/articles/securedand-unsecured-borrowing-explained. 2. Saxton, Helen. Interest Rates Guide. Money Saving Expert. [Online] April 2015. [Cited: October 5, 2015.] http://www.moneysavingexpert.com/banking/interest-rates#compound. 3. The Money Advice Service. Mortgages- a beginner's guide. The Money Advice Service. [Online] [Cited: October 6, 2015.] https://www.moneyadviceservice.org. uk/en/articles/mortgages-a-beginnersguide. 4.. Payday loans- what you need to know. The Money Advice Service. [Online] [Cited: October 6, 2015.] https://www.moneyadviceservice.org.uk/en/articles/payday-loans-what-you-need-to-know. 5.. Pawnbrokers- how they work. The Money Advice Service. [Online] [Cited: October 6, 2015.] https://www.moneyadviceservice.org.uk/en/articles/pawnbrokers-how-they-work. 6.. Peer to peer lending. The Money Advice Service. [Online] [Cited: October 6, 2015.] https://www.moneyadviceservice.org.uk/en/articles/peer-to-peer-loans.