An Introduction to Personal Loans
Do Unsecured Loans and Secured Loans Really Balance Household Bills?
Apr 3, 2009
A personal loan is granted by either individuals or financial institutions for almost any purpose. The rate of APR charged to customers is based on a combination of credit history, the provision of collateral and affordability. Both unsecured loans and secured loans alike are governed by the Consumer Credit Act 1974 in order to prevent unfair or unjust lending practices by ruthless lenders.
Reasons for Getting a Personal Loan
The most common reasons for taking out personal loans are home improvements, debt consolidation, foreign holidays and car purchases. Without access to personal loans it may take many years to save enough money to pay for a car. Without a homeowner loan, very few people would be able to buy their own home.
How Unsecured Loans Work
An unsecured loan is a personal loan that isn't backed by collateral. In the event of loan default, the lender of an unsecured loan has limited powers to collect the debt. This means that individuals borrowing money can opt for a debt solution, such as a debt management plan, Debt Relief Order (DRO) or Individual Voluntary Arrangement (IVA), in the event of financial difficulty.
How Secured Loans Work
A secured loan provides financial institutions with collateral. Common examples of secured loans include homeowner loans, pawnbroker loans and logbook loans. Should someone borrowing money default on the terms of the agreement, the lender is entitled to sell the asset to recover their money. In the case of homeowner loans, creditors can pursue debtors for up to 12 years. It is only 6 years for unsecured loans.
How a Bad Credit Rating Affects Personal Loan Rates
Individuals that have missed or made late payments on personal loans will have a bad credit rating registered with credit reference agencies. This will not only make borrowing money more difficult, it will also result in a higher rate of interest charged on both unsecured loans and secured loans. A high APR can make paying other household bills more difficult.
The Term of Personal Loans
Payday loans, pawnbroker loans and logbook loans charge borrowers a usury rate of up to 1000 per cent. The high APR also means that the term of a loan is only a few months. Those with a good credit rating may find that they can get an unsecured loan over 5 years. Secured loans offer the longest repayment period with personal loans available over 25 years.
Achieve the Best Loan Rate with a Loan Comparison Service
It isn't always possible to get the best loan rate from the local bank. An online loan comparison service enables those borrowing money to achieve the best loan rate. A loan comparison service also allows a borrower to search for personal loans when a bad credit rating is an issue. This service isn't available for pawnbroker loans, logbook loans, credit union loans or payday loans.
Consumers that are considering taking out a personal loan should always use an online loan comparison service to get the best loan rate and help balance household bills. Always think carefully before turning an unsecured loan into a secured loan. A longer term may appear attractive, but many consumers would be better-off pursuing a debt solution, such as a debt management plan or Individual Voluntary Arrangement.
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