A Smart Guide to Loans

Finance Index

With an increasingly diverse range of money-lending services available, taking out a loan can be a confusing business. What is a personal loan anyway? Is there any difference between a personal loan and a secured loan, and importantly, which type of loan is the right one for you?

To help you navigate around the difficulties of money borrowing, here's a short guide to the most common terms used by banks and loan companies.

Personal Loans

Personal loan is an umbrella term, which covers all loans made to individuals as opposed to companies and businesses. These can include car loans, consolidation loans or home improvement loans, and vary in size from a few hundred pounds to several thousand pounds. Loans for personal finance matters are also referred to as finance loans. Unless very large, personal loans are generally taken out on an unsecured basis; this means that it is possible to take out a personal loan even when you can give the lender no specific security. The term can also cover higher value loans or loans where security is required because the borrower has a less than ideal credit history. For examples of personal loans, Alliance and Leicester are a resourceful and comparative reference point.

Secured loans

A bank or lending company which agrees to lend a large amount of money to an individual will generally ask for security; this type of arrangement is therefore termed a 'secured loan'. Secured loans will usually only be offered to homeowners who have sufficient equity in their house to cover the value of a loan. Because of the safety this affords to the lender, it is generally possible to get secured loans of a higher value and with lower rates of interest than in the case of unsecured loans. Like mortgages, secured loans are also usually repaid over a longer period of time, keeping regular payments down.

A mortgage is a loan that you take out to buy a property. The two main types of mortgage are called 'repayment' and 'interest only'. The first type requires you to make monthly payments for an agreed period of time until the mortgage is paid back, while the second type involves paying back only the interest with your monthly instalments. If you choose an interest only mortgage because of the cheaper monthly repayments, you must take into account that the original loan amount will still be owed to the lender at the end of the repayment period.

Student loans

Student loans differ from personal loans because they generally carry a lower rate of interest. The size of the student loan that you may apply for depends on the income of your parents, the location you are studying in, and a number of other factors such as whether you suffer from any disabilities. The interest rate is tied to inflation, and students are not required to begin paying it off until they are earning over £15,000 per year. In addition, the debt is cancelled if it has not been repaid within 25 years of repayments beginning. The government's website, DirectGov, is one of the best information sources for this type of loan on the Internet.