Get to know the ABCs of loans

Whenever there is a financial crunch, one of the most common ways to overcome it is to take out a loan. But, due to lack of basic knowledge about the financial market and the different types of loans many unscrupulous lenders rip off unsuspecting loan seekers off their hard earned money. To avert such a situation, why not acquaint yourself with the financial terminologies and make an incisive decision in opting for the best loan?

What are the main types of loans?

Generally, loans are divided under two heads - secured and unsecured. Secured loans are also referred to as homeowner loans where citizens of UK who own a home can use their home as a security in lieu of the loan amount. Unsecured loans may be termed as a personal loan, where by the customer does not need to provide any asset as security to the lender.

What is the difference between a secured and unsecured loan?

Before approaching any banking institution or private lender, you must know the difference between the two main loan types before making a quick decision. We provide you a guide for quick differentiation;

Secured loans: This refers particularly to asset based loans where the homeowner has to pledge his home to the lender against the required borrowing. Due to presence of security, there is minimum risk for the lender. Therefore, this financial aid comes at a cheap and more affordable terms.

You can borrow money ranging from £5,000 to £100,000. Usually, the upper limit varies from lender to lender.

• In the presence of security, you are benefited with competitive APRs.
• The repayment time is spread across 25 years, thereby, keeping your monthly outflow to the minimum.
• Homeowners with CCjs, arrears, bad credit profile may also get approval for this loan.

Unsecured loans: These loans are non asset based loans and can be procured for meeting personal requirements. As no security is required, even tenants can also apply for this financial help. The interest rates charged against unsecured credit is higher than its secured counterpart. The absence of property however aids in quick processing of the request.

• Your credit scores and debt to income ratio is taken into account before sanctioning your borrowing amount.
• You can borrow up to the maximum of £25,000.
• You can re-pay your loan in a time-period of 10 years.

Can I earn additional benefits in secured loans?

In case you apply for secured credit, these are few of the benefits that you will be entitled to:

• repayment holidays
• deferred payments
• accelerated repayments
• Choice of interest rate as fixed, variable or capped.

Who shall I approach for a loan?

The UK loan market is one of the most competitive markets worldwide. Therefore, there is no dearth of lenders. You can approach various lenders like

• high street banks and building societies
• private lenders
• supermarket and high street stores
• specialist loan providers

Each lender has various schemes that vary from one another. You have to choose depending upon your personal circumstances.

What Tips should I follow before obtaining a loan?

Cited below are the golden tips to be considered while procuring a loan:

• Don't make hasty decisions in borrowing money. Make sure not to go beyond the required amount.
• Make sure that you read the small print as they carry the most important information about your loan package.
• Ask as many questions when in doubt. Don't hesitate asking till you have answers to all your queries.
• Incase there is a possibility to pay off the loan much before the stipulated time-period, recheck the possibilities of any redemption fee. The usual practice among many lenders is to charge an interest of two-months as a penalty.
• Figure out if there is any administration fee for the arrangement of your borrowings. Many lenders charge no fees for it, but incase your profile cannot be done without it, they may charge you to the maximum of 1% of your total loan amount.
• Don't get lured with the words of one lender. Always shop around and take different loan quotes to get the overview of secured or unsecured loans that are available to you. Compare them online for quick and instant processing.

Where can I get more reliable information about personal finances?

Financial watchdogs, such as FISA (http://www.fisa.co.uk/) and FSA (http://www.fsa.gov.uk/) also provide a lot of relevant information on their sites.