What is a secured personal loan?

So, why do people take out secured personal loans? Well, firstly you may want to borrow money in order to increase your home's value by making improvements to your home. Others may take on a debt consolidation loan, which means that you take on a large loan for a long period, which pays, off your other loans and credit cards and you end up paying a smaller monthly payment than you were paying with all of your other loans together.

Secured loans offer lower interest rates, due to the lower risk that is being taken on by the loan company.

If you default on your payments, you will find that loan providers will be a good deal more patient with you. Because they know that they have your home as collateral for the loan, they will give you more time to recover from whatever problems you are having that are making you late on your payments. This is not guaranteed though, so take the time to plan your payments and make sure that you can make them comfortably before you take the loan out.

The application process is a lot longer with secured loans than with unsecured loans, due to the fact that your loan provider will need to value your home. The cheaper rate that you should get can make this worth the wait.

However, it is easier for you to be approved for a secured loan. Because you are betting your home that you can make your repayments. It is very likely that your loan is far smaller than the value of your home, so the loan provider will like those odds, and see it as less risk. Financial product providers like less risk, and especially like shared risk.

What is an unsecured personal loan?

On the plus side, your loan application would be processed quicker, meaning that you would be able to get hold of your money quicker. This is because your home doesn't need to be valued as part of your application. So, once you submit an application, you can expect a reply and a decision to be communicated very quickly.

Don't think, though, that by taking out an unsecured loan you are ridding yourself of all risks associated with borrowing money. If you default on your payments, you can have court proceedings taken out against you. This can lead in the worst case to your home having to be sold. The way that works is that if you can't pay the loan provider back with money, the court can order something of yours to be sold/ Depending on the amount outstanding on the loan, this could be your home. So, you can turn an unsecured loan into a secured loan by defaulting on your unsecured loan payments.

Because you don't have immediate security, you may find that the loan providers will be less patient with the fortunes of their investment. They're more likely to chase you aggressively should you be defaulting on payments. This means your credit record could be affected, which in turn lessens your ability to get any more loans or financial products.

Loan companies will check your credit record in order to get a credit score for you before they will give you any money. Your credit score is contributed to by your employment history, your accommodation history, and your repayment history with previous financial products.

It's all about striking a balance between getting quick access to funds and being prepared to pay the extra that you are charged for the privilege. As long as you are absolutely sure that you can make the repayments, secured loans are cheaper.

Loan Provider types

Bank or building society loans and overdrafts:

Credit brokers

Credit brokers arrange loans from, for example, insurance or finance companies and make a charge for this. If the broker has not arranged a loan within six months the maximum the broker can charge is £5.

Doorstep sellers

The doorstep sale or promotion of goods or services, such as double glazing or home improvements, on credit is illegal unless the company has a licence to sell credit outside trade premises. Any agreement that is improperly made may not be enforceable.

It is a criminal offence to try to make a cash loan outside trade premises unless the visit is made to your home in response to a written and signed request. Any agreement that is improperly made may not be enforceable.
If you have entered into an agreement of this type you should consult an experienced adviser, for example, at a Citizens Advice Bureau.

Credit unions

A credit union is a self-help co-operative whose members pool their savings to provide each other with credit at a low interest rate. If a member fails to repay a loan, the credit union can seek repayment through the courts.

Money lenders

Money lenders usually lend small amounts of money at high rates of interest.

There may be sources of credit more suitable than using a money lender. If you are considering borrowing from a money lender, you should first consult an experienced adviser, for example, at a Citizens Advice Bureau.

What is the difference between a bank loan and a personal loan?

With both a bank loan and a personal loan you borrow a certain amount of money from a loan provider and repay that amount at regular intervals, along with the interest on that amount. However, the difference between them is that a bank loan is literally specifically from a bank. It wasn't too long ago when the only place that you could get a loan was your bank, which is why many people used to talk about the need to maintain a good relationship with your bank manager. But now that you can get personal loans from building societies and other financial companies as well as your bank, this isn't so important any more.

Banks, as we know, take money in via savings deposits, whilst also offering mortgages and insurance. But one of the reasons why banks make loans is that they have to pay interest to those savings depositors, and making investments with that money that makes a return higher than the interest they have to pay is how to do this. Providing loans enables banks to charge interest, which recovers the cost of lending the money whilst also offering a profit to the bank, part of which they will use to pay interest to depositors. This is how the banking system works, and accounts for the 'circular' nature of the money supply.

Banks are more careful about to whom they lend money. Applicants with bad credit ratings are unlikely to receive loans from banks, because banks by their very nature tend to be more cautious when they make investments in businesses, financial products and people. So you will need to provide proof that you can repay the loan in the future and part of that is your credit history. You need to be 18 or over to get loan, and, importantly, a bank will need a reason why you require the loan before they give the money to you.

Reasons for a loan are important. Banks don't ask for loans for marketing reasons, or for a 'big brother' type observance of your behaviour. You are not asked for a reason in order for you to be caught out, but it is so that they can provide particular products that suit your purpose. If, for instance, you want a home improvement loan, you will not need all of the loan capital at the same time. You could get a quote for home improvement to be performed, and then find that the amount you actually need is larger or maybe smaller than you originally expected. So banks can offer home improvement loans in tranches, which stops borrowers from borrowing too much or too little.

Will I be able to get a loan if I have bad credit?

Whatever risk people pose to a loans company, there are still possibilities available to borrow some money, so do not give up just because you have a bad credit rating. What does make a difference is the amount of interest you will have to pay. You will get a bad credit rating if you have defaults on repayments, mortgage arrears of county court judgements (CCJs). To lenders, your past history is a flag to your reliability in repaying a loan. Even if the problems you encountered in the past are over now, your past is what's important. Should they choose to take that risk, they will cover themselves by charging you more interest.

Loan providers use credit checking companies to find out your credit rating when you apply for most financial products, but especially loans. Most of Britain's adult population will feature in these files. Any CCJs or other financial problems will show up on your credit record. Bear in mind also that the credit checking company count people living at your address as relevant to you. The reason for this is that some people have been found to apply for a loan on behalf of someone else at their address with a bad record, then transferring the money to them. So this trick will not work any more! If you have a good record and are living with someone with a bad record, beware that you may find trouble getting approved for any financial products, whatever your relation to them.

It's also worth knowing that every time a search is performed on your credit record, it leaves a "footprint" on it, and that has been found to be negative for your credit rating. So, you could apply for store credit, credit cards, hire purchase, loans, whatever, and it actually harms your credit rating. You may never have financial problems, but you should think hard before you apply for financial products. Your credit rating and history will affect whether you get a loan, and the terms of that loan.

In general, you will find it difficult to get approved for a loan by a building society or bank should you have had recent financial problems. These days, you can also apply to financial organizations that are perfectly reputable and well established for loans that are based not on your past history but on your current circumstances. In return though, you should expect higher fees and interest rates.

No matter how careful you are financially, unplanned events such as redundancies, illnesses and divorces or having a small period of difficult markets when self-employed could cause you to have a bad credit history. Search the market, and you may still find a loan, so don't give up.

I need to consolidate my debts, is it advisable to get a consolidation loan?

Debt consolidation loans are like penicillin. For some people, they can work extremely well, and solve all kinds of problems. But for others, debt consolidation loans can cause some catastrophic side effects. Other kinds of debt management could solve your problems instead, so make sure you understand exactly what a debt consolidation loan is, and what it isn't.

If you have a bunch of credit cards an unsecured personal loans, and are either having trouble paying all of them, or feel that the total payments you are making are too high, then you have the opportunity to take out one secured loan, large enough to pay off all of your other debts, but over a longer period than those debts, so your total payments are lower each month. Remember though that this isn't just a loan that pays off your other bills, it is also a second mortgage on your home.

This is significant. Your debt consolidation loan is usually to cover for a financial situation which is negative. But you are paying off a debt by taking on a debt, and the situation could get worse. Now you have a secured loan, worse MEANS worse. A secured loan is taken out with collateral put at risk. Should you default on the repayments of a secured loan, the collateral could be repossessed. So, even if you are paying off your mortgage comfortably, if you can't pay off your secured debt consolidation loan then your home could be foreclosed upon.

You must remember that this is not philanthropy. The companies who advertise debt consolidation loans are not charities. They will tell you that the main selling point of these products is the reduced monthly payments. They will use language such as "debt restructuring" but it's no different really. The other "advantage" that they will advertise is that they can make an additional lump sum available to you on top of paying off your debts. Bear in mind that the more money lent to you, the more money they can make as the more money you will have to pay back.

Think about why you are in the position that you are in, needing this debt consolidation loan. Maybe, despite your best intentions, you couldn't make those large credit card payments this month, but you could make the monthly payments on a debt consolidation loan. If you go down the debt consolidation route then you must be absolutely sure that you would still be able to make payments even though if your employment, health or financial situation changes unexpectedly. If you can't, then you could lose your home, and is it worth making that bet? Only if you can win it.

What is a bridging loan?

If you are in a chain, where you are buying a home at the same time as selling a home, it's possible that you'll be put in the situation where you need to complete your purchase, but the funds from your buyer are not present. At this time, the vendor may threaten to accept someone else's offer unless you complete at a certain date. Without the proceeds from your home's sale you would have nowhere to turn. This is where bridging loans come in.

Bridging loans could be for a substantial sum, from £25000 to cover a shortfall to up to a few million pounds to fund the whole purchase. The amounts are borrowed for periods from a week to up to six months.

Product providers like these sorts of loans because they are meeting their customers' needs. But think about the word 'needs'. Customers get bridging loans at times when they really NEED them, and opportunistic product providers can take advantage of this.

Bridging loans are readily available, as the fact that they should be paid back very quickly makes them slightly less risky. But the people taking out a bridging loan are usually in a situation where they are desperate enough that they would accept some punitively expensive rates on the loan. Because of the short term of bridging loans, interest rates will be around 2.5% a month, and that multiplied by 12 is 30%, so you can see how high the rate actually is. In addition, you may also have to pay an administration or management fee of about 1.5% of the loan, depending on the loan's size.

A bridging loan is not too dissimilar to mortgages. The amount you borrow is secured on your home, except the advantage of mortgages is normally a low interest rate. Because of this, you need to be very careful, as if you fail to sell your existing home, you may have to also sell your new home in order to simply pay off your bridging loan. You could be left out of pocket from the legal costs from buying and selling your houses, plus the interest you'll have had to pay on the loan before you had to pay it back. Even having spent that money, you'll still be back where you originally started. Thus, you should view a bridging loan as solely a convenient, but very last resort.

Product providers will ask you to fill in an application form for a bridging loan, similar to a mortgage application. Because of your needs, product providers will try to give you a decision within 24 hours, and the money should be given to you within a week.

How do I find the cheapest rate for loans?

First of all, the type of loan you choose materially affects the rate that you pay. For instance, the cheapest way to borrow money that you'll ever have the chance to take advantage of is the student loan. You can take a student loan out as long as you are in higher education. You can go to your local awards authority (where you live not study) in order to apply, and there are also specialist student lending firms who will lend you the money. The rate of inflation forms the basis of the interest that you are charged (so at the moment it's 2.5%). You don't have to begin paying the amount you borrow back until the April after the end of your last year of university, although it is charged to the amount immediately after you borrowed it.

If you are taking a course of higher education which is not your first degree and is strictly vocationally related, then a career development loan would be available to you throughout your educational period. You would be covered for two years for training and a year's practical work experience should you need it. Like the student loan, the repayment is deferred until after the course (a month following the course is when you start repaying). During the course, your interest is paid by the DfES, the department for education and skills. But you need the course to be vocational, as whether or not you're earning you need to start repaying the loan a month after you finish training.

Mortgages are the next cheapest borrowing method. Current account mortgages combine home loans with flexible additional borrowing, which is not much different from an extended overdraft, which happens to be the size of your mortgage. This can be paid off at the speed that you are comfortable with, and you can borrow up to the amount of your mortgage if it is convenient, which is a cheap method of finding money to make large purchases, like a car.

Should you have a mortgage, you may also find that your mortgage lender will lend you money should you wish to make home improvements, like a new bathroom or kitchen. You may only be charged your standard mortgage rate for this, mainly due to the fact that the improvements should add value to your home, which benefits both you and the mortgage lender.

Should the routes outlined above not be available to you, and you are a homeowner, you can still borrow and "secure" the amount against your home. Your property acts as collateral, so should you default on your payments, you could lose your home. Thus, you should make sure you can afford the repayments.

How do I find a low interest loan?

What happens if your choice of loan is limited? What do you do if you're not a student, have no intention of commencing vocational training so the career development loan is not open to you? If you don't own a home, so can't get a mortgage, you'll not have anything that you can seriously use as collateral against a secured loan. Mortgages and secured loans are cheaper than unsecured personal loans, but if the above applies to you, unsecured personal loans are your only option. But how do you find the lowest interest rate?

Many people start by walking down their local high street. You'll see advertisements for loans in building societies and banks. You'll also see that they will happily trumpet the fact that their loans are at low rates. This is because they are comparing themselves to each other, rather than the whole market, and know that if you are comparing only high street financial organizations then they don't need to offer the lowest interest rate to get your business. You will also find that the low rate that they quote can only be found if you borrow very high amounts over very long periods, and have a perfect credit record, so look at the small print.

There are loan providers who do not have a high street presence. This is similar to the credit card market. Look out for adverts or communications on the radio, TV or on billboards, or even sent to you by post. Don't be fooled by the presentation, though, check the amounts you can borrow, the periods you can borrow over, and APRs for comparable products. Since information is dispersed, you may find it difficult to compare products from different providers.

The print media, such as magazines and newspapers, do allow you to compare loan rates, in that they will often publish 'best-buy' tables, which are usually quite clear in the information they convey, especially as the rates are all based on the same products, in terms of amounts and terms. However, the data isn't dynamic, so you can't make sure it's definitely the best product for you.

This is why the internet is seen as an advantageous step for consumers. Personal finance websites normally contain comparison services, otherwise called search and select applications. You can enter the exact amount that you wish to borrow, and the period over which you wish to pay it back over. You may also be asked for other details, in order to present you with a list of the best loans for your own personal circumstances. You can sort the loans by interest rates and in most cases apply online. You should also get an indication of the likelihood that you'll be approved.

What is a career development loan?

The aim of the career development loan (CDL) is to help you fund vocational training or any job-related education. It was created by the government to tackle the situation where young people are leaving school and even university with no vocational training or experience that will actually get them a job (what exactly does a media studies degree prepare you for?!). It also helps those who wish to change their career or to gain skills to stop them having to rely purely on unskilled occupations for their income.

The amount you can borrow is between £300 and £8000. The funding can be for anything up to 2 years of learning time. Also, should you need to do work experience as part of your course, that can be funded too, up to one year.

Like a student loan, the CDL is a deferred repayment loan, but is actually more comprehensive. The DfES (Department for Education & Skills) pay your interest on the loan whilst your course is continuing, and will carry on for the first month following the course's end. You then start repaying your loan. Should you finish the course before the date that you have agreed with the loan provider, you will still have to begin repayments a month after the end of when you finish. Your repayments are subject to a fixed rate of interest for the agreed payback period. When you agree the loan, these variables will be fixed.

Unlike a student loan, you have to commence repayments whether or not you are earning an income a month after the course has finished. For this reason, you should make sure that the course is vocationally related and will lead to a job market that is open, and also that you work hard on the course and try to gain from the work experience to make sure you have a job as soon as the course ends, so that the repayments will not be too punitive.

If you decide to go for this scheme, the first thing you should do is find out the course that you would like to go on. Be sure that it leads to a defined career, and that the market for people with the skills that it teaches you is open to new joiners. You should then find out how long the course lasts for and how much it will cost. Once you have gathered together these details, you can approach one of four banks, who have joined together with the DfES. These are Clydesdale, Royal Bank of Scotland, the Co-operative Bank and Barclays Bank.

Finally, even though this is an unsecured loan, you will still need to make the repayments.

I am a tenant, how am I able to get a personal loan?

Should you be a tenant, you are not able to get a secured personal loan, for the simple reason that a secured loan needs your home to be collateral. Loan providers like secured loans, as if they don't get the repayments, they have the option of repossessing your home. This makes the loan less risk for the providers, thus you can obtain lower interest rates.

Juts because you can't get a secured loan doesn't mean that there are no options available to you as a tenant. Unsecured loans do not need security provided against them. This lessening of borrower risk is counter-weighted by the increase in lender's risk. This is why unsecured loans tend to feature higher interest rates.

Another feature of these products is that the loan provider will be a great deal less patient with any defaults on the loan. Since they don't have the security of your home to fall back on should they not receive their money back, they will be more aggressive in forcing you to pay up.

The unsecured loan application will be processed quicker as well, because there is no requirement to have your home valued before the decision. However, a corollary of this is that you'll find it more difficult to get approval for a loan. More detailed credit checks will be carried out on you and the decision will be more hard-nosed than with secured loans.

The credit rating process uses your address, work and financial product history in order to assign you a score, which is used to make a decision about lending to you. To help you predict what could happen to you in a credit check - if you have changed jobs frequently and/or changed addresses frequently, it will be looked upon negatively, as your income is not viewed as reliable in the long term, and you are seen as less reliable. Ideally, you will also have had only a few loans and cards, and have never defaulted on them.

Should your credit rating be low, or you have bad credit, then you can still get loans. You'll have to pay a higher interest rate, and the choice of loan provider will be a lot smaller, but it's still not a bad idea, as should you repay the loan on time and reliably, then your credit rating will improve.

To find the best loan product for you, use a comparison service. This will allow you to enter your personal details and loan needs, and tell you what the cheapest loan available to you is, and hopefully also the criteria you need to meet in order to be approved for the loan.

What are home improvement loans?

Should you wish to make major improvements to your home, how would you fund it? If you have savings, that's all well and good, but if you don't have the money put away you may want to borrow it. Should you wish to borrow money specifically to improve your home though, there is an option that it's worth learning about. This is the home improvement loan.

In some ways, this is a mortgage extension. Your mortgage lender will like to lend you money for this, as you are increasing the value of property that they own until you have paid back your mortgage. They also like the fact that you will have to pay interest on your home improvement loan as well, so they can make more money out of it.

You can actually buy your property and organise a home improvement loan at the same time. The way to do this is to add up the home improvement loan and the mortgage amount and check that it doesn't add up to more that the property's value. After you buy your home, you can normally arrange a further loan up to around £25,000.

So why should your mortgage lender be your first port of call? Simple really, this is a secured loan, so you can get a lower interest rate anyway, but also you have the advantage of being able to borrow the money at your mortgage lender's standard variable rate, which should be lower than any personal loan rates. Even if you won't receive the mortgage rate, you should at least find yourself able to obtain a favourable loan rate.

If you can't get more money from your mortgage lender, then some other loan providers will offer special home improvement deals. These deals may feature money advanced to you in tranches, which take account of home improvement work costs being difficult to predict. The final cost could well be more or even less than you originally budgeted for, so being able to borrow only the money you actually need is important.

Bear in mind, though, that you need to fund essential improvements with a home improvement loan. It will not help you out for most extension work, unless you can show that it is essential. Rather, you want to use the loan to fund a new bathroom or kitchen, or a safety improvement. Should your work not be essential, then you may have to ask instead for an extension on your mortgage. The difference between this and your home improvement loan, is that an advance has to be repaid over 25 years, which means more interest is paid. A home improvement loan is the same interest rate but a shorter repayment period.

Can I take out payment protection on the loan?

When most people take out a loan, they fully intend to pay it back. Hence they may not think about what would happen if they should encounter an unexpected problem that means that they would have trouble making their loan repayments. What if you fall ill, and can't earn a decent income any more? Maybe you could be in a car accident? You could also be made redundant, sometimes when you least expect it, and if that happens then you could struggle to make repayments.

Should you have taken out a secured loan, unless you are sure that you can repay the loan throughout its course, you should take out some protection on your payments. A secured loan is taken out using your property or something very valuable to you as collateral, and your lender has the right to repossess that property should you default on your payments. Even if you have an unsecured loan, the lender can resort to the courts to recover the money they lend to you, and in the end your property can be sold to make good on what you owe.

This is why personal payment protection plans (PPP) are a good idea. You should always consider them even if you feel you are very likely to pay back the loan comfortably. A good PPP should include unemployment cover that caters for most occupations. Should you be self employed, you should be able to get PPP to cover you for insolvency or bankruptcy, as well as sickness or an accident stopping you from working.

Some PPPs require a medical, but most will not, relying on you to be honest with your health situation (should you claim for sickness, they may look into your medical history, and check that you didn't lie about your medical past, in which case you would be denied cover). You should be given cover for accidents, sometimes for accidents resulting from leisure pursuits that are hazardous. You should also be given some sort of sickness and hospitalisation cover, and life insurance as well. Finally, you should get cover for the length of the loan, and if not you can get renewable cover should the loan be outstanding at the end of the term of the payment protection.

Bear in mind that you must prove when you claim that you didn't know when you bought the policy that you were sick or about to be made redundant. There is usually a 3-6 month period after you buy the policy during which you are not covered. Also you may need to have a deferred period before you receive payment, and the cover will only be for a certain period. Check the policy details carefully.

Is Payment Protection Insurance Suitable for me?

When most people take out a loan, they will find that the lender suggests that they take out payment protection insurance as well. Sometimes, this is a genuine attempt to make sure that you are covered for your payments if anything unexpected like redundancy, sickness or an accident should befall you. Sometimes, though, it is an opportunistic attempt to get some more money off you for what could be an inappropriate financial product. Some of the people who sell payment protection plans (PPP) are not specialists in the field and are likely to have only a passing acquaintance with the rules and terms of the policies they are selling. Thus, borrowers shouldn't take their 'advice' as gospel, and should make sure that they are certain as to what they are paying for, and are equipped to judge if it is suitable for them.

The Association of British Insurers (ABI) has a code, which is being replaced by the code belonging to the General Insurance Standards Council (GISC). This code requires sellers of PPPs to make sure as far as possible that their proposed policy is suitable to the resources and meets the needs of the prospective policyholder.

How does a seller determine that a policy is suitable? Well, they need to look at the information supplied by the prospective policyholder, but not to leave it at that. The seller needs to ask some specific questions to the borrower in order to determine suitability properly. The seller cannot cover all aspects of the borrower's financial and personal position, and is not expected to do so, but there is some relevant and pertinent information without which it is not possible to give a suitable product recommendation.

This would deal with the frequent problem of borrowers being sold insurance which they are not eligible for. An example of this would be the selling of a PPP to someone not 'actively working' when the sale is made. If a person is on sick leave when they buy a PPP, their claim will not be met, which could leave them in a particularly bad financial predicament. It's also possible that a director of a company, who is regarded as having sufficient information about the future of the company not to be eligible for redundancy protection, to be sold it anyway. All the insurer has to do if it is determined that they have made an unsuitable sale is to refund the premiums. That will not help if the borrower's house is at risk. The regulators' view is that claims should be met in these cases.

You need to make sure that you ask for all of the restrictions on the policy to be made clear to you at the time the insurance is bought. By the time you claim, it could be too late.

Can I claim on PPP if I am suffering from stress or mental illness?
Almost all Payment Protection Plans (PPP) exclude any claims which result from any form of mental illness, including stress. This is unfortunate, and can leave many unemployed claimants with little to no recourse.

But the fact is that in the past decade the distinction that used to exist between mental and physical illnesses has been disappearing. The illnesses that PPP purports to cover should take care of a range of medical symptoms, and how this doesn't include mental symptoms, the insurers have not really been able to explain. 50% of all illnesses are, according to media reports, caused by mental illnesses. So it is a significant and unrealistic limitation of cover to automatically exclude mental illnesses, and it is sometimes not being made completely clear to purchasers of insurance before they buy the policy.

The reason for insurers' concerns about mental illnesses such as stress and depression is that they are very difficult to diagnose and verify with confidence, which means that actually assessing claimants fitness to work is extremely difficult. Some insurers address this by only accepting claims should the insured person be receiving treatment or have been referred to a consultant for their condition.

It gets more complicated though if you are made redundant fairly and squarely, but then suffer from depression. When you claim for unemployment you need to be actively seeking work. But you can't do that if you are too ill to sign on.

So, you have the combined impact of not being able to claim on sickness benefit due to being diagnosed with a mental illness, and also not being able to claim for unemployment due to restrictions on your redundancy policy. Both of these individually are reasonable exclusions, but together they are unfair. Redundancy is an extremely difficult thing to take, and stress related symptoms are commonly related to it. If someone can't look for work as they are sick, then how is it fair that they can't claim due to their insurer stipulating that a claimant must be actively seeking for work?

Should someone be made redundant, then suffer from an illness which would have been covered by a disability policy, then they are covered under the redundancy policy. Had they still had a job when they contracted that illness, they would have been covered under disability policies.

It is not unreasonable that an insurer should require someone to whom they are paying redundancy benefits to be searching for new employment. But they do need to accept that some people made redundant will suffer from ill-health which stops them searching for work for a period, but which will not affect their prospects for re-employment when they do eventually look for work.

What is the difference between a mortgage and a loan?

A lot of people get these two mixed up. Sometimes, people will go looking for a mortgage when they really want a loan. Other times, people will try and get a loan when they actually need a mortgage. Fundamentally, they are the same thing. But it's important to understand why it is necessary to refer to them by different terms. First, let's look at definitions:

A loan is simple. You borrow some money from another party, and then pay it back to them. The term over which you borrow that money could be anything from 6 months to 5, 10,15 or even 25 years. However, in general you would be more likely to want a mortgage if you need to borrow for 25 years, because of the lower interest rates, but more about that later. You pay a loan back normally in monthly instalments, which include both the capital (or principal) and the interest on that capital. Loans can be unsecured, meaning you do not have to provide any security as a guarantee that you will pay it back, or secured, in which case you do. Because most loans are paid back over short periods, you'll find that the interest rate, or APR on them will be higher than with a mortgage.

What is a business loan?

A business loan is specifically taken out to fund your business. They are normally available to be paid back over a period of between 1 and 15 years. In order to decide whether to get a loan, you should take a careful look at your business's investment needs. Then you should look at your cash position. Your decision about how to fund whatever you wish to invest in should depend on your cash position but also on your business position.

Why is this? Because when you take out a loan, you are preserving your cash position, which means that your liquidity is also preserved. You will find it a lot more difficult to get a business loan on favourable conditions if you are in dire need of cash. This is because your interest rate and amount you can be loaned will depend on your ability to pay your loan back. If your cash position is precarious, then you'll find that your interest rate is higher as the lender would feel that they are taking more risk. Should your cash position be strong, then you'll get better loan conditions.

Some people think that if they are in an adverse personal credit position, they can get a loan through their business. But many lenders will look at your personal credit history as part of your decision whether to give you a business loan. This will particularly be the case should you be a sole trader or a member of a partnership. Should you have a bad credit history, with maybe a bankruptcy or a late payment or two, then you should write a letter explaining the circumstances that brought you to your credit position and, presuming they have changed, how they have, and include it with your application. Don't cover up your problems under any circumstances, because if you are found out, then you're extremely likely to be shown the door by the lender. So be honest, and hope that honesty lessens the impact of the black marks held against you.

In order to improve your chances of getting a loan, you need to show the lender why you will be reliable with your loan repayments. If you have accounts, show the lender your earnings history, and if possible a realistic assessment of your future earnings potential. It will also help you if you have personally invested in your own business. This will show the lender that your interest will be aligned with theirs, and you are both sharing the risks in your business.

Should you be a sole trader, you will be responsible and liable for the repayments. In a partnership, all partners will be jointly responsible. Finally, if you are a company, the directors are likely to be liable.

What sort of loan is best for you? There are secured loans, unsecured loans, fixed rate loans, variable rate loans, capped rate loans, car loans, homeowner loans, consolidation loans, and more. What do you need the loan for?

Fixed Rate Loans

A fixed rate loan or mortgage, as the name suggests, is a loan where the rate of interest is fixed for at least part of the loan period but not necessarily the entire loan period. The advantage of this form of borrowing is that it means the borrower and the lender will have a more accurate idea of how much will be paid back by the borrower in the final analysis. Furthermore, as the interest rate is fixed, it will not be affected by fluctuations in interest rates. Thus, you will not benefit from reduced interest payments that would accompany a drop in interest rates but you also wouldn't be required to pay more in the event of interest rates going up. When the likelihood is that interest rates are set to rise and remain at a high or higher level for some time then fixed rate loans are likely to increase in popularity.

Variable Rate Loans

Capped Rate Loans

Personal Loans

A personal loan is simply a loan to an individual that can be for any number things. A personal loan can be a secured or unsecured loan and is not always dependent upon your credit standing. There are loans for people with adverse credit as well as for those with good credit. Personal loans are still available to people who may have, for example, defaults or a CCJ (county court judgement) against them. However, personal loans for people with bad credit history tend to be secured loans as a result of the perceived increase in risk.

Homeowner Loans

A form of personal loan is a homeowner loan. As inferred by the title, a homeowner loan requires you to own you own home which the loan you get will be then secured against. Homeowner loans tend to be easier to get provided that you have equity in your property. For this reason, those with CCJs (county court judgements) or arrears or poor credit history could find it easier to apply for homeowner loans.

Payment Protection

When taking out loans or mortgages of any kind, it is often advisable to take out payment protection. Payment protection insurance could prove essential if your income should be interrupted for any number of reasons (e.g. illness, injury, or unemployment). Payment protection insurance can then take over your monthly payments for you until such a time that you can resume the monthly repayments yourself. Payment protection can be offered by a lender at the same time as the loan or can be obtained separately from a third party company.

Consolidation Loans

On the face of it, the idea of getting a loan to help manage your debts may seem contradictory. However, a consolidation loan could prove the ideal way to reduce your monthly outgoings to an amount that you can afford. You can get a loan to payoff your other debts so that you are left with one debt, one interest rate and one monthly repayment which is lower than your previous monthly repayments combined.

Car Loans

Car loans are self-explanatory and you will not need us to tell you what a car loan is about. However, there are car loans (or all purpose loans) that you can get that will provide you with a loan and no more. On the other hand, there are other car loans companies from whom you can purchase a car. This in itself can include benefits like break down cover, the car delivered to your door, collection or part exchanging of your old car. For this reason, you could think of such car loans specialists in the same vain as you might any car dealership because there may be additional benefits offered from different lenders that you might find more appealing.

You should remember that if you do not keep up repayments on a secured loan or mortgage then your home or other security is at risk

Being refused credit

How creditors decide whether or not to give credit

Lenders use a number of methods to decide whether or not to give credit. If you are told you cannot have credit you can apply again, either to the same company or another one. You have no right to be granted credit or to be given a reason why credit has not been granted, although some creditors may give this information.

Credit scoring

Points are awarded for such things as occupation, salary, marital status and area of residence. Credit is given if you score enough points. If you apply for credit, you must be told if this method has been used.

If your application has been refused, you can ask for the main reason for refusal and for the decision to be reviewed by the creditor. You should give the creditor any additional information that you think should be taken into account.

Credit reference agencies

A credit reference agency builds up information on your financial position from the electoral roll, county court judgments, bankruptcy details, and payment record in previous agreements. The payment record may include details of other people living at the same address, and their record may affect whether or not you are given credit.

If you have had your application for credit refused because of information on a credit reference agency’s records you can ask the creditor which credit reference agency it used. You can then get a copy of the record from the agency. You will have to pay a fee for this. You can ask for your record to be corrected if it is incorrect or misleading. If the record includes details of other people living at the same address, you can ask to be dissociated from them. You may also be able to ask to be assessed as a separate individual. There is, however, still no guarantee that credit will be given.The contact details of the main credit reference agencies are:-