personal loan guide

Secured or unsecured are the two options available to most people, although by far and away most people arrange their personal loans on an unsecured basis.

Secured loans are - as the name suggests - arranged on the assumption that the borrower is going to put up some kind of surety to the lender.

Generally this is the borrower's property. This means that the lender has the right to take ownership of the asset if you fail to make the repayments that are due under your loan agreement.

While most of us would baulk at the prospect of putting our homes on the line, there are advantages to taking out a secured loan.

For example, the lender's risk of default is reduced, which usually means a lower interest rate or perhaps a longer repayment period.

One of the key differences between secured and unsecured loans is that it is usually possible to borrow far more by going down the secured route.

Lenders will consider much higher sums if they know they have a security over your property and it is possible to arrange up to £100,000 - but you'll typically need to put the deeds to your home on the table.

The amount borrowed is repaid monthly over an agreed term agreed at the outset, which will usually range between three years and twenty five years.

You may be charged a penalty if you repay your loan earlier than agreed, and you should check each lender's individual policy.

But the key issue here is that, when you see that bleak warning notice 'Your home is at risk if you fail to keep up with repayments', it really does mean that. Consider therefore the risk of losing the asset, were you to fall into arrears with the required repayments, against the advantage of paying slightly lower regular payments.

It will probably come as no surprise to learn that around 90 per cent of all loans arranged fall into the unsecured category.




Put simply, you do not have to put up any surety for the loan, and the lender trusts in you and your ability to repay the debt.

The rates of interest charged are normally higher or the maximum loan terms are significantly shorter than those available for secured loans, but even so, five years - or 60 months - is usually long enough to cater for most borrower's needs. And if you are able to arrange a loan at less than 6 per cent, then you can see why levels of personal borrowing are today higher than at any time previously - even during the consumer boom of the late Eighties.

Most people will prefer to take out a fixed interest rate, which effectively means it will stay the same throughout the term of the loan, regardless of any changes in the bank base rate.

In much the same way as arranging a fixed rate mortgage allows you to determine your monthly repayments, allowing you to budget accurately, so does the fixed rate personal loan.

But go for a variable interest rate, and you will find your repayments will rise and fall in line with any changes to the bank base rate.

Although lowest APR is one factor that contributes to a 'cheap' loan, you should always pay attention to the small print as any additional costs will be found there. Remember also that if your credit rating is not as good as it might be, lenders will see you as a higher risk and may not offer you the lowest APR on their personal loan products.

That said, do not be too thrown if you have to pay a slightly higher APR. The difference between one or two per cent on repayments spread over three years is very little in the overall scheme of things.

Some lenders do apply an early settlement charge (also known as a redemption penalty) if the debt is repaid in full before the agreed end date.

This can be up to 2 months interest so it pays to check this out before you commit. If you think you'll clear the debt before the end of the term then your best bet will probably be a loan with no early settlement costs, even if the APR is slightly higher. Whatever you decide, you'll need to do your sums before you sign on the dotted line.