Loans of all kinds
Personal loans come in two main types: secured and unsecured. Secured loans, on the other hand, are tied to something you own, usually your home. This is why they are often called "homeowner loans." If you don't pay back a secured loan, the lender can make you sell the asset to pay off the loan. Car loans are also secured loans because the lender uses the car you are buying as collateral.
A home is tied to a loan for a homeowner. Frank Baron took the picture. Most lenders offer unsecured loans ranging from GBP5,000 to GBP25,000, but some have a limit of GBP15,000. If you look around, you can find smaller loans, but if you only need a few hundred pounds and not thousands, there may be better ways to borrow the money.
If you want to borrow more than £25,000, you will need a secured loan. To get the loan, you will also need to have enough equity in your property.
Rates of interest
The amount of interest you pay on a loan each year is called the APR (annual percentage rate). Most loan ads will give you a "typical APR," but that doesn't mean you'll get the same rate when you apply.
Unless you choose a lender with a "one-size-fits-all" interest rate, what you pay will depend on how much you want to borrow, how long you want to borrow it for, and your personal and financial situation.
A bank must have offered its average APR (or a better rate) to at least 66% of people who might have been interested in getting a loan.
Interest rates can be fixed or change over time, and it's important to know which one you're getting. A fixed rate won't change over the life of the loan, so your monthly payments won't change either.
A variable rate can change, usually in line with the base rate set by the Bank of England. This is good news when interest rates go down, but it can be scary if rates go up and you need to find more money than you thought to pay off your loan.
Repaying your loan
Most loans are paid back in monthly payments, usually through direct debit, over a period of time that is agreed upon before you get the money. When you agree to the loan, the lender will tell you how much you need to pay each month.
The time you have to pay it back is usually set, and if you want to pay it off early, you might have to pay a penalty, like two months' worth of interest. The longer the time it takes to pay back the loan, the more interest you will pay, so choose the shortest time you can.
Flexible loans, where you can borrow money and pay it back whenever you want, are becoming more common, but the interest rates are often much higher.
If you don't pay on time, the lender will put that on your credit report. One or two late payments might not stop a new lender from giving you credit, but if you've missed a lot of payments, you might have trouble getting credit elsewhere.
Where to borrow money
There are a lot of places that offer loans, from high street banks to banks that only work over the phone or internet to building societies, credit unions, specialised loan companies, and even people who come to your door.
Most of the time, the deals offered by specialists and online banks are cheaper than those on the high street. However, this isn't always the case, so you should shop around, either online or by getting quotes from different lenders.
The interest on some Doorstep loans can be as high as 900 percent. Garry Weaser took this picture. Door-to-door lenders may be the most expensive way to borrow money. Unlike traditional lenders, they often give out amounts of less than GBP50, which are usually used to pay for unexpected purchases, and they get paid back every week. APRs, on the other hand, can be as high as 900 percent, so borrowers who can avoid them usually do so.
Credit unions are an alternative to traditional lenders and can be a good choice for some borrowers because they can't charge more than 2% a month on the loan's decreasing balance (an APR of 26.8%), and most only charge 1% a month (12.7 percent APR).
Most credit unions offer loans without collateral for up to 5 years and loans with collateral for up to 10 years.
Getting into difficulty
When bad things happen, it can be hard to make your monthly payments. If this happens to you, don't just throw away letters that come to your door.
The best thing to do is to talk to your lender as soon as possible. Banks and building societies are usually willing to help, and they might offer to put the loan on hold or make it take longer to pay back.
Their main goal is to get their money back, but it is usually better and cheaper for them to reschedule your payments than to go after you.
If you have a loan on your house or another asset, it is especially important to be honest with your lender. If something goes wrong, you may have to sell the asset to pay back the loan.
