Know About Personal Loan

Personal Loans: the Lifeline of Finance
Anywhere you run in the world of business, whether you’re a consumer or an entrepreneur, finance caters to your practical needs. Personal loans help you to fulfil your personal needs with the things that money can buy.

Taking loans has become a necessity for all of us for meeting our daily requirements in a world driven by finance. From purchasing a new house, to buying a new car to covering our medical costs to catering to our health, education or cosmetic needs, banking on loans is the norm.

Ironically, how many of us can really profess to know the nitty-gritty of borrowing and lending? Apart from statistical calculations to determine which type of loan would be more profitable for you, the terms that we comes across in the loan market can be taxing to the brain. Let us try getting into the basics of the loans concept, as applicable to the UK market.

The first thing to remember is that a loan is a kind of a debt. Loans are usually given at a certain rate of interest charged by the lender on the loan amount. A personal loan is granted for personal, family, or household use. Loans are usually paid back in instalments, with a fixed or variable rates of interest charged thereof. Giving loans is one of the main jobs of banks. Issuing debt contracts, such as bonds is another way of providing loans.

Secured Loans
Secured loans involve mortgage. This means that, if you want to get a loan, your lender is given a security of your house until the time that you fully pay off the mortgage. If the borrower is unable to pay off the loan in the agreed time-period, the lender will have the right to take ownership of your house to recover the due amount. Despite the risk involved, secured loans or second charge mortgage is a commonly preferred way, in fact by almost 80% of the borrowers in UK because of the much lower rate of interest or APR (Annual Percentage Rate) in comparison to an unsecured loan, and more flexibility in terms of repayment.

Home Equity Loan: A home equity loan is a scheme whereby you can pledge your house on mortgage to secure a loan. In this way, you can convert the equity (total assets minus liabilities) of your home into cash to finance your other needs, such as debt consolidation, college education or other expenses.

Flexible Repayment
Secured loans generally come with repayment schemes that suit your convenience. There can be mutual agreement between you and the lender about how much your monthly repayment will be. Also, the time period for repayment can be adjusted as agreed upon by both the parties. The repayments are charged at an interest rate or APR (Annual Percentage Rate) as deemed applicable.

At present there are three schemes of repayment or interest rates offered by the lenders.

1. Fixed: Here the interest rate is fixed. It is charged at a fixed rate regardless of the rising or falling market prices. Even if the base rate is hiked up by the Bank of England, there will be no effect on the interest charged against the loaned amount. But, in case of a drop in the interest rate, the borrower is required to pay the interest fixed by the lender at the time of the loan approval.

2. Variable: The lender charges you as per the current market rate which obviously keeping varying. Your interest rate will be evaluated on the basis of the current base rate that is prevalent in the market.

3. Capped: Here a particular upper limit of the interest rate is fixed or the interest rate is capped at a certain rate. The lender can only charge interest as per the current market rate but not beyond the capped rate even if the market rate increases.

Collateral is your home or your property that you pledge against the loan principal. It is regarded as a guarantee that you will repay the debt. In the event that you are unable to do so, the lender can take over your collateral. The lender may then sell it to recover his money. This is called repossession.

Threat of Repossession
The threat of repossession of the borrower’s property is quite possible in case of failure to repay the loaned sum in secured loans. Repossession means that the lender can take over the possession of your house or your property in case of non-fulfilment of the clauses in the loan agreement.

Unsecured Loans
Unsecured loans are of many types and marketing packages. Some of them are:
• Credit Card Debt: A Credit Card Debt occurs when you make purchases using the credit card. Interest is charged on the debt, and if it is not repaid in time, penalties have to be incurred by the debtor. The late payment or default may also be reported to credit bureaus who calculated your credit scores by keeping a track of your credit history.
• Bank overdrafts: When you withdraw more money out of your account than is available, your account balance goes negative, which means that the account provider is actually offering you that money. This amount has to be repaid later and the procedure is known as over-drafting.
• Corporate bond: A corporate bond is a bond issued by corporations. Corporate bonds often give a high yield. However, you must assume certain risks. For example, the bond issuer may default on the payoffs. Also, rising interest rates in the market can reduce the yield. Bondholders are given priority of payments over those to stockholders.

There are variable rates of interest on these packages. The rate as charged is often fixed by the lender and agreed to by the borrower. In UK, unsecured loans may come under the Consumer Credit Act 1974.

In unsecured loans, the borrower need not pledge any asset as collateral to secure a loan. Therefore, there is no risk of repossession of your house. However, lenders would naturally prefer borrowers with a good credit history. That is to say, if you have been particular about your repayments, you will have an easier time finding lenders willing to give unsecured loans.

Conclusion
Personal loans, in short, are for everyone. Personal loans are the norm everywhere–wherever finance is the means of transactions. Depending on your financial requirement and fiscal standing, you may apply for either loan type. Don’t commit yourself to the first loan deal that comes your way. It is always better to compare the APRs that are prevalent in the market and then decide on a loan package that works best for you.

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