There are many reasons why people might need a loan at any stage of their lives. Young people just getting started, perhaps needing to bridge the sometimes very long gap between starting a new job and that all-important first payday, might need a loan to invest in some good quality office wear or other tools and utensils for the job; young couples expecting a first baby, perhaps one coming a little sooner than originally planned, might need a loan in order to equip the nursery; bigger families often have unexpected bills to pay or appliances to buy – washing machines break down, once-in-a-lifetime school trips to dream destinations come up, and birthdays are a constant annual expense that sometimes takes us unawares. A loan is essentially an advance on expected income, to be paid back all in one go when the funds are available or over time in pre-agreed increments. Needless to say, the companies (sometimes banks, but also other financial institutions (although all are usually governed by financial authorities) who offer loans do not do so for free. A certain percentage will be added to the amount borrowed, and this is the lenders' profit.
There are many different types of loans available today, each tier aimed at a certain segment of the population, with varying amounts of interest to be paid back and with differing terms and conditions depending on the basic financial security of the borrower.
A secured loan is one that is taken out, using a valuable asset, usually a house, but also expensive jewellery or any other asset that the lender is prepared to accept as collateral against the loan. In these cases, ownership remains with the borrower, but will pass to the lender (either fully or in part depending on the terms and conditions and the amount borrowed) in the event that the borrower can no longer make their repayments. Sometimes the lender will insist on keeping the item if it is small, or the title deeds to property, in their possession until the loan is paid off in full. These loans are usually for substantial sums of money, and have a relatively low rate of interest to be repaid.
Unsecured loans are offered on the basis of proof of future income rather than an asset. These are a very common type of loan, offered to people with a regular income suffering from a temporary cash flow issue. They are usually only offered to people (whether couples or singles) with the ability to easily make repayments every month. The application form for these loans will usually require a detailed amount of financial information in order to ascertain the suitability of the borrower to repay the loan promptly. While more readily accessible than secured loans for non-home-owners, these loans are not offered to those who are unemployed and even some self-employed people, freelancers or students can struggle to be accepted for such a loan.
These loans are also very common, and tend to be for smaller amounts of money and generally must be paid back very quickly, within three months or at the first instance of the lender receiving their salary. While the amount of interest paid often appears to be very reasonable, the interest rate (that is to say, the percentage charged) is often quite high, often over one hundred per cent APR (annual percentage rate – the basis for the interest charge on loans). However, these loans are quite readily available, without all the stringent checks and references required for larger, longer-term loans.
Debt consolidation is a practise in which a person borrows a sum of money in order to pay back all their other debts. For example, the repayments on a credit card or two, mail order companies and possible a series of smaller loans could potentially add up to a considerable sum, with each of the bills adding extra interest each month and the minimum payments barely lowering the bulk of the debt while consuming a considerable amount of the borrowers disposable income. Consolidation means transferring all these small debts into one medium-sized debt with just one payment to be made per month, hopefully a moderate payment that comes to less than is currently being spent on all the other bills.
Log Book Loans
Log book loans work in principle like secured loans, but they are taken against the lenders motor vehicle. The borrower gets to keep his or her car, while the lender holds onto the vehicles log-book and ownership papers, in order to claim the vehicle in the event of a default on the loan. Log book loans tend to be short term and have a relatively high APR, although, like payday loans, the actual amount repaid does not seem punitively high.
- Work out how much you need, and how long you will need to repay the loan in full, while still living comfortably and within your means
- Decide if you qualify for a secured or cheaper unsecured loan. As mentioned above, you will have to supply a lot of information to the lender before they will approve your application
- Pay attention to the fine print. Some companies fill their terms and conditions with plenty of legalese and baffling repetition. It is a pain, but do try to work through the whole document before signing it. Ensure that you are allowed to repay the loan early without punishment, and make sure that you fully understand how much you will be repaying each month, when repayments will begin and when they will end. It also pays to ask about what would happen in the event of an unexpected emergency meaning that you have to miss a payment or two. Only when you are comfortable with what you are signing up to, should you go ahead and sign!
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