Providing Some Clarity to Loans
“Consumer spending reaches record levels!” – a not unfamiliar news headline. However, if you take a look at the year-on-year rise in consumer spending figures and then compare those figures with the year-on-year rise in wages, you’ll immediately notice a disparity. Lately, rises in consumer spending have far outstripped rises in wages. So, how is this happening? The answer: record rises in the levels of debt financing.
Debt financing can come in many forms: credit cards, hire-purchase and store cards being principal among them. However, probably the biggest form of debt financing is the loan. However, the various different types of loans available can leave those unfamiliar with loans confused. The following is a brief explanation of loans to try to help you here.
Simply put, a loan is something you borrow from someone willing to lend it. However, in the highly regulated world of financial markets, things are not that easy. As a result, “loans” involving money have a variety of names, depending on the intended use of the proceeds (money).
* Personal Unsecured Loans:
Probably the mainstay of loans is the personal unsecured loan. As it name suggests, a personal unsecured loan is money that you borrow from a bank or building society. As part of the loan agreement you agree to repay the principal of the loan (the amount borrowed) plus interest (the lender’s profit). In most cases you’ll agree to repay the loan in equal [monthly] repayments. However, you do not agree to provide any security (or collateral), in the case that you default on your repayment.
The upside of an unsecured loan is that the lender cannot repossess the item that you have bought with the proceeds of the loan, nor can they enforce against any of your other assets.
The downside of an unsecured loan is that, in return for the lender’s greater risk factor, you’ll likely be paying a higher level of interest than is the case with a secured loan. You also need to be a little careful: the concept of an “unsecured” loan is a misnomer. In fact, in most cases, you’ll need to declare what the loan is for, and if you do happen to default the lender will likely bring an action against you to seize the assets. Consequently, if you think it is unlikely that you’re likely to default, to reduce the costs of the loan, it’s probably just as well that you take out a secured loan.
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* Personal Secured Loans:
Obtained in the same way as a personal unsecured loan, the main difference being that you agree to provide the lender with security, in the case that you default. “Security” can come in many forms (for example, share certificates, car, boat, plane, even cash bank accounts); however, these days banks prefer this security to be a charge over your house.
The upside of a secured loan is that interest rates and costs are usually lower – as the lender still has recourse to funds in a worst case scenario.
The downside to a secured loan is that you run the risk of losing the asset if you cannot repay the loan.
* Other types of loans
Depending on your needs, you may also come across the following types of loans, which are more specific to the application of the proceeds of the loan: car loans, student loans, home improvement loans, holiday loans, bridging loans, debt consolidation loans. Essentially, all of these work in the same way as a secured or unsecured loan.|
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