Tips on Choosing a New Loan

Take a walk down the high street and look into the windows of the banks, and you’ll immediately be met by a confusing array of loan deals, entrenched with facts, figures and percentages, and surrounded by small print and financial jargon. Try a different tack and search the internet and the same banks appear, with the same offers, alongside a whole lot more. For someone new to finance, understanding what is being offered with the various different types of loans  can be very difficult. With this in mind, the following article is an attempt to describe in brief the main different types of loans available, and their relative uses.

Secured or Unsecured Loans?

The first distinction between types of loans is between secured and unsecured loans. In simple terms, with a secured loan, sometimes referred to as a ‘homeowner loan’, the borrower will use an asset of large value and put this down as security against the money borrowed. Should the borrower then default on payments, the bank or lender is then legally allowed to repossess that asset, in order to sell it to get the money owed back. On an unsecured loan, which is also commonly referred to as a personal loan, there is no security against the loan. Because of the added risk of the lender losing out if the borrower defaults, you will find that personal loans will usually have higher APRs and lower potential amounts to borrow. Take a look at ASDA Finance for low cost homeowner loans  as well as personal loans .

More Types of Loan                 

The most common types of unsecured loans are credit cards, personal loans, and authorized overdrafts. The difference between personal loans and the other two is that credit cards and overdrafts don’t demand a fixed repayment schedule; you can pay back when it suits you, or just pay the minimum payment (normally the interest + the same again in repayment). For small amounts of money, it might be worth bypassing a personal loan and asking your bank to grant an overdraft which are often given interest free for low amounts, or just use a credit card. If you need to borrow lump sums of greater amounts, say £5,000, a personal loan is probably a better option.

Making Repayments

The simple issue with repayments is that the smaller the amount, and the quicker you pay back, the less interest you pay. There are however, certain exceptions. In general, if you are looking to borrow around £5000, the interest rate will drop substantially if you borrow more than that amount. Generally, the more you borrow, the smaller your APR (interest rate) will be.

Another thing to consider with your loan is whether it is to be a fixed rate loan or a variable rate loan. With fixed rate, the interest rate remains the same for the duration of the loan, and is normally slightly lower than variable. You are offered less flexibility in terms of repayment, as well as borrowing more. Variable rate loans are slightly more expensive in interest, but offer greater flexibility. You can pay off the loan immediately, or extend your loan depending on circumstances with fewer fees.