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What is a Loan?

A loan is a way of borrowing money from a financial institution, lender or a private individual to fund a purchase, pay off other debts or fund other projects. When taking out a loan, you will have to agree to pay a certain amount of money, called the principal, back to the lender plus additional interest charges over a period of time, called the term.

The type of loan you need depends largely on the purpose. Secured or unsecured, personal or business or any other loan – the options vary. Here is an overview of some of the most common types of loans you might come across.

Secured Loans

Secured loans involve borrowing funds against a security – typically your home, or other property. As the loan is secured against your property, lenders usually offer more generous terms and lower rates.

These types of loans are usually used for larger projects such as home improvements, financing a car or debt consolidation.

Unsecured Loans

Unsecured loans don’t require you to give any property as collateral. This makes them riskier for lenders, and usually come with higher interest rates and more stringent conditions.

These are more commonly used for smaller purchases or paying off other debts.

Personal Loans

Personal loans are typically used to finance large purchases like a car or holiday, and can be secured or unsecured. Generally, these loans have set terms, a fixed repayment schedule and a fixed rate.

Business Loans

Business loans are typically used by companies to purchase goods or services, finance working capital requirements or looking to expand. These are secured and unsecured loans, though the borrowing company would need to have a good credit rating and a solid business plan in order to be approved.

Finding the right loan

Choosing the right loan can be daunting, but it’s important to be thorough and shop around for the best rates. Be aware of the different types of loans, consider the cost, duration and your financial position. Don’t be lured in by cheap deals as often these come with lots of additional fees and charges.

Remember, borrow responsibly, always read the conditions carefully and recognise that not repaying your loan can have a very negative effect on your credit score. With the right advice and research, you can find the loan to meet your needs.

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