Loans Made Simple
A loan is a debt provided by an entity (organization or individual) to another entity at an interest rate, and evidenced by a promissory note which specifies, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and date of repayment. A loan entails the reallocation of the subject asset(s) for a period of time, between the lender and the borrower.
A SIMPLE GUIDE TO LOANS
Most people at some point in their lives need to borrow some money. It’s, therefore, important to understand the different types of loan, as well as how to secure the best rates. If not, you could end up with a poor deal - and costly credit can send you into a downward debt spiral.
Loans fall broadly under two categories: secured and unsecured. With a secured loan, the lender will insist you provide some sort of security against the money you borrow, often a house or car. If you default on the payments, the bank or building society can then sell the asset to clear the debt.
An unsecured loan, often referred to as a personal loan, is not secured against any asset. Of course, you still have to pay the money back and the lender could sue you if necessary to get its money back, but you don’t have to put up your assets as collateral. Your ability to secure the cheapest rates depends on your credit score, and you should ensure that you can repay the loan before you apply for one.
If you have run up other debts at high rates of interest, a personal loan can be a good way to manage your borrowings and bring down the cost. Let’s say you have built up a debt of £3,000 on a store card that charges interest of 29%. You could take out a loan for £3,000 at, say, 8%, to pay off the store card balance and reduce the monthly payment.
On a separate note, you could cut up the store card and forestall any further temptation of going on a shopping spree and adding to the debt!