Loan and Borrowing Methods
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There are many types of loans available on the market, as well as various other methods of borrowing money. This article looks at the variety of ways you can take out loans or borrow of cash.
Overdraft Mortgage
Secured Personal Loan
Unsecured Personal Loan
Debt Consolidation Loans
Home Equity Loans
Credit Cards (Separate article)
Home Improvement Loans (Separate article)
Student Loans
Best Buy Loans
Overdraft Back to top
One of the easiest, and sometimes cheapest, ways to borrow money is to use an overdraft on your bank account. Usually there are two types of overdraft, an authorised overdraft and an unauthorised overdraft.
An authorised overdraft is where you agree with the bank a certain amount that you can owe on your bank account. These types of overdraft can often offer very low rates of interest, or in some cases (especially with student accounts) the overdraft can be completely interest free. The amount you can go overdrawn by is usually shown on your bank statement, as well as the next time the bank wishes to discuss your overdraft. At this point that bank could demand that you pay off your overdraft, especially if something has happened to lower your credit rating. So bear in mind that even though an authorised overdraft can be a good cheap way of borrowing money, you will have to pay the cash back at some point, and it might be sooner than you think!
An unauthorised overdraft is where you do not have any arrangements with your bank, and you have more money taken out of your account than you had in there to start with. This is usually very bad news, as the bank will firstly usually charge you a fixed penalty for going overdrawn (typically 50 pounds), and then will charge you a high rate of interest on the money that you owe them. In general it is best to avoid an unauthorised overdraft.
Mortgages Back to top
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Mortgages are simply secured loans from a bank, building society, or other financial institute, where you borrow the money in order to buy a house. The loan is secured on the house, and if you fail to keep up with the payments then there is a risk that your building will be repossessed. Usually mortgages are a fairly cheap way of borrowing money, as the banks / building societies have you entire house as a guarantee and so the loan / mortgage is not quite as high risk to them as some other types of loan are. Unsurprisingly, there is a huge, huge, range of mortgages available, ranging from 5-35year mortgages, with endowment policies, equity mortgages, ISA mortgages, tracker mortgages, discounted mortgages, fixed interest mortgages This list is endless! This article will not discuss the various mortgages available out there, but if you are considering getting one then it is best to shop around a lot, and perhaps consult a financial advisor.
Secured Loans Back to top
Secured loans are mainly categorized by the fact that they are for homeowners. This means that the person taking out the loan uses their home as collateral. Should you fall into difficulties or are unable to make the repayments on your loan you will sooner or later lose your home. This is why before taking out a secured debt consolidation loan it is vital that you solve the root of your debt problems and make sure that you have budgeted fully and can cover the loan repayments.
Car secured loan
These are similar to secured loans for home owners, but are specifically designed for people who want to take a loan out to buy a car. Usually they can offer better value than hire purchase scheme, and there is less risk involved for both parties as if you do not keep up repayments then you can have your car repossessed. Not ideal, but better than losing your home!
Unsecured Loans Back to top
An unsecured loan is a debt obligation which is not backed by the pledge of specific collateral unlike a mortgage where your house is collateral against the loan. People with bad credit may be eligible for this type of loan. Apply for an Unsecured Loans here.
These loans differ from secured loans by the fact that they in theory provide less risk to the person taking out the loan due to the fact that their house is not used as insurance on their payments. Whilst this is true in theory, it is common that once someone who has taken out an unsecured loan defaults on their payments, they will have court proceedings taken against them and their home. This could in effect result in the loss of their home, turning what was once a less risk loan into a secured loan! Be extra careful to ensure that you can keep up the payments on these loans. Loan companies often act aggressively on payment defaulters to ensure the stability of their investment. The cheapest loan from a reputable company that we at 'Whatprice' have found is Goldfish who offer personal loans at an amazing 6.2% APR. Alternatively you could search for a better deal at 24 hour loan who search for the best deal for you.
Debt Consolidation Loans Back to top
Debt consolidation can be a good way of saving yourself money by reducing existing debts into one manageable monthly payment. If you are paying off money at a high interest rate, or you have outstanding credit card bills, a loan could reduce your monthly outgoings considerably. However do be wary of taking out a debt consolidation loan to pay off credit card bills etc, and then just simply running up similar credit card bills once you have paid off the initial bills with your consolidation loan. If you are not careful you will end up where you started, except this time you have consolidation loan repayments, as well as all you other credit card and other debt repayments to meet.
Home Equity Loan Back to top
A home equity loan can be a good alternative for people not wishing to sell their home to get money from it. You can borrow money relating to the equity you have in your home. It is important to remember that if you cannot make the repayments on these loans, you will most likely lose your house.
Student Loans Back to top
The range of financial packages available to students seems to change every single year. However for the last few years the government has managed to stick to one type of student funding, and that is the student loan. This is a loan that all students are eligible to apply for, and it offers probably the best loan deal on the market! The interest rate of the loan is fixed at the level of inflation in the UK, therefore the actual real value of the debt never increases. The loan repayments scheme has varied slightly over the years, however in general the loan is paid back over around 5 years, as long as you are earning above a certain amount of money. This amount again varies, but is usually set at around the average UK earnings level. If you are not earning this amount of money then you can simply defer loan repayments until you are; indefinitely. This is probably the only loan available where if you cant afford to repay it, you don't have to! Of course to be eligible for such a loan you have to go to University, and probably saddle yourself with many other debts in the process. And there is a limit to how much you can take out each year (it is only a couple of thousand at the moment).
If you are one of the lucky ones who can afford to go to University without getting into large amounts of debt, then it is still worth taking out your full quota of student loans. As the interest rates charged on the loan are set at the level of inflation, you can easily make money by taking out the loan, putting it in a good savings account, and earning money on the interest. As long as you choose a decent account (perhaps a savings bond, or even invest in the good stocks and shares), then you will always make more money than you are charged in interest on the loan.
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