Loans are financial products that allow private individuals or businesses to borrow money from lenders (such as banks, building societies, peer to peer lenders, pawnbrokers, payday loan companies, credit unions and new online lenders). They must be repaid over a specified period, with regular payments of a specified amount of money.
When a loan is made, except in exceptional circumstances the borrower does not get money for free: each loan comes with a number of loan charges. These charges can include interest added to the sum borrowed (usually stated in terms of the APR, or annual percentage rate), charges for missed loan repayments and in some cases administration charges for taking out the loan.
The loans most borrowers will require are personal loans. These are loans taken out by private individuals or couples for home improvements, holidays, the purchase of cars, debt consolidation or any of a number of other purposes.
They are generally split into two types: secured loans and unsecured loans. The former are loans secured by a property of some form (an example being logbook loans, which are secured against motor vehicles); the latter are not secured on property, any decision by the lender relying on the credit rating of the borrower. With secured loans, the property used to secure the loan is at risk if payments are not made.
Short Term Loans
In recent years short term loans – including their variants payday loans and same day loans – have become much more popular. These loans, as their name suggests, are designed to offer smaller amounts than standard loans over much shorter repayment periods. A further distinction is that many short term loans can have excruciatingly high interest rates, sometimes thousands of percent. This means that borrowers should be very careful when taking out these loans as it is very easy to get into financial difficulty with them; those that do get into difficulty should take advantage of the free debt advice available from debt charities and government organisations.
Peer to Peer Loans
Peer to peer loans are another product that is relatively new to the market. With them, borrowers borrow from other individuals and small investors rather than big institutions. This can result in cheaper loans for borrowers and a good return on their investment for those individuals acting as borrowers.
Loans for People with Debt Problems
A variety of loans are available for borrowers that have been struggling with debt. Debt consolidation loans allow those with debts spread across a number of loans and credit cards to bring them all together. This means it is easier to keep track of payments, and if a low interest loan is obtained the amount being repaid can be lowered.
Some borrowers with debt problems, however, will find it difficult to obtain low interest loans due to a poor credit rating. For this reason, bad credit loans have been developed: these are loans aimed at those that find it difficult to obtain credit normally. The drawback with them is that interest rates, and therefore monthly repayments, are much higher than normal.
Car loans are specialised personal loans that are available from motor traders and certain industry-specific online lenders for consumers that wish to buy cars.
In order to study at university, many students will have to rely on student loans. In the UK these loans are available as part of a government-backed program devised to provide funding for students unable to afford university fees. They provide funding for tuition fees and maintenance costs.
Business loans are another type of specialised loan: they are available for businesses rather than private individuals or couples. They are usually arranged by banks through dedicated business banking services.
When comparing loans, it is a good idea to use a loan calculator to get a precise idea of the repayments that will be necessary, and whether they will be affordable.