A loan is an amount borrowed from one person or professional lending body (i.e. a bank or financial institute) in which the amount is then repaid. The amount is often subject to a time frame such as x amount of pounds paid back over x amount of months usually with an amount of interest on top. The loan is then a debt in which the borrower then owes the lender. The most common type of loan is an unsecured loan and this taken out from a bank or building society.
Unsecured loan
This a monetary loan which is unsecured, meaning that the debt is not secured to any of the borrowers possessions such as their house, car etc. The most common type of unsecured loans are personal loans, credit cards and a bank overdraft. These will often be subject to an interest rate in which the borrower must pay back on top of the money already borrowed. This is subject to the Consumer Credit Act of 1974.
How much interest will I pay?
The interest rate or APR is often determined by firstly the loan amount and secondly the level of risk. Before an application for an unsecured loan being accepted the lender will carry out a credit check in which will assess the likelihood of the loan being paid back and the creditability of the borrower based on their credit histoy. Things such as mobile phone contracts, store cards and any previous loans will have an affect on this. The reason for this is that as the loan is unsecured they have to assess the person on their ability to pay the loan back.
What is a secured loan?
A secured loan is a debt in which is backed up by an asset, for example a house or car. This gives the lender a guarantee or ‘collateral’ in case for whatever reason the loan is defaulted on and they then have something to cover the debt. This type of loan is commonplace in business and a mortgage is described as a secure loan as if payments are continually missed the bank has the right to repossess the house.
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