Know your loans

Types of loans

One of the things you'll need to consider when choosing the best loan is whether you want to secure your borrowing. Here, we’ll explore the difference between about secured and unsecured loans. 

Secured loans 

Secured borrowing, including mortgages, generally involves lower monthly repayments over a longer term than unsecured borrowing. But overall, you may pay back more than you would over a shorter period. Also, it does carry a higher risk as the loan is normally secured against your home.

Secured loans are most suited for larger, one-off purchases or expenses such as home improvements, debt consolidation or a new car.

The ups and downs of secured loans:

• You can usually agree to a lower Annual Percentage Rate (APR) than on an unsecured loan. On the downside, if you default (fail to keep up repayments) on your loan, you risk losing your home
• You can usually agree to make lower monthly repayments. On the downside, you'll have to extend your borrowing term to do this – which means that you'll pay back a greater amount overall
• If the equity in your property is worth substantially more than the outstanding mortgage, you may be able to extend your loan – although not necessarily at the same interest rate as your existing home loan
• But again, if you're using a secured loan to pay off several unsecured loans, your home is at risk if you don't keep up repayments

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

Unsecured loans

If you don't own your own home – or you don't want to secure your property against a loan – you could take out an unsecured personal loan, overdraft or apply for a credit card. Here, we look at each in more detail.

Personal loans

Loans are suited for larger, one-off purchases or expenses.

They are usually repayable in fixed monthly instalments by Direct Debit over a fixed period. Most people borrow between £1,000 and £15,000 but you could borrow less or more depending on the lender, whether you can afford the loan and whether you have a valid need.

Overdrafts

These are typically attached to your current account. They can be used for different purchases and expenses – such as repaying bills or buying new furniture for your home.

Overdrafts are flexible and easy to apply for. An authorised overdraft can be good value in the short term or in an emergency, but straying beyond the agreed limit will mean fees and potentially higher interest charges.

Credit cards

Credit cards are another flexible way of borrowing. They can be used for multiple purchases, such as buying groceries, shoe shopping or paying bills.

Aside from a minimum monthly balance payment, borrowing on credit cards allows you to pay off the debt in your own time. However, if you only make the minimum payment each month, it will take you longer and cost you more to clear your balance. You can also make lump sum repayments. Be aware of the interest rates, as high rates can spell poor value for longer-term borrowing.

What are you borrowing for?

It's important to be clear about why you need the money before choosing the best loan for you. For example, credit cards can be handy for short-term or emergency borrowing but they're an expensive way to fund larger or longer-term financial needs.

What can you afford?

At the simplest level, APR relates to the total charge for credit – the amount of interest you pay plus charges such as arrangement fees and annual fees – and when and how often this must be paid. But the APR is only a guide. It may not include additional charges you may incur, such as early repayment charges for loans and late payment charges for cards. In addition, you may not be eligible for the rate featured in the ad you see. Make sure you read the terms and conditions. To truly compare loans, focus on the actual amount you will repay and over how long.

How long should you take to repay a loan?

It’s good to repay the loan as quickly as possible – but watch out for early repayment charges. Lenders often charge lower interest rates if you borrow larger amounts or pay back over a longer period. However, the longer the term, the more interest you'll have to repay in total.

If you get turned down

If you apply for a loan, you'll have a credit reference agency search done on you that will leave a 'footprint' on your credit rating – this can affect future borrowing requests. If you keep applying for loans and get rejected, it will have a negative impact on your ability to get credit in the future.

If you change your mind

Use any cooling-off period included in your credit or loan agreement to really make sure you can afford to repay your loan and meet the requirements of the terms and conditions.

Debt – be careful

Don't let desperation be your motivation for borrowing more – it will only lead to bigger problems. Rolling several expensive debts into one cheaper loan to reduce your outgoings can be a good idea – but borrowing more on top of this is not.