Fixed Or Variable Interest?

With some loans, such as personal loans and some shop credit schemes ), the interest rate is fixed at the time you take out the loan. You know exactly how much you'll have to repay and when. This can help you plan your budgeting, but if interest rates fall you could be stuck with an expensive loan. Other loans, such as overdrafts and mortgages have a variable interest rate which yo-yos up and down with interest rates generally. Sometimes you can put off - at least for a while - increasing your payments in line with the increase in the interest rate but that does, of course, add to the amount of money that you owe.Will you have to provide security?

You can usually borrow more cheaply and for longer if you're prepared to put up some kind of security - usually your home, or some kinds of life insurance policies. If you fail to keep up the loan repayments, the lender can use the security or the proceeds of its sale to get back what you owe. You should never take out a secured loan unless you are sure that you can repay it within the specified time.

TIP - Though a secured loan will be cheaper than an unsecured loan from the same source, check that you can't get a cheaper unsecured loan from another lender.

WARNING If a loan is secured on your home and you fail to keep up the repayments, you could lose your home. In 1988, building societies alone forced the sale of some 20,000 homes because of failure to keep up mortgage repayments.

Note The legal system for secured loans is different in Scotland and, as a result, charges associated with secured loans are much higher than elsewhere.

Will you want to pay off early?

As long as the agreement for the loan is 'regulated' under the Consumer Credit Act, you have the right to pay off any loan whenever you like. The lender has the right to be compensated for the interest they've lost because of the early repayment. But they can't charge you the full amount of interest that you would have paid had you kept the loan going - you have the right to a rebate of part of it. The Consumer Credit Act lays down a formula which must be used to calculate the amount of the rebate that you get. Some lenders make an 'early redemption' charge if you pay off a secured loan before the end of its original term.

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What is The Loan For?

Some loans are more suitable for some purposes than others. Section 3 gives details of all the main types of loan, but here are a few general pointers. Bank overdrafts and credit cards are often good choices for short-term borrowing to pay household bills, buy a new hi-fi or to pay for a holiday. Some shops offer their own credit schemes - these can be expensive, but 'interest-free' credit is usually a good deal as long as you can't buy the same goods more cheaply in another shop. Insurance company loans and bank ordinary loans are excellent for longer-term purposes, such as buying a car or paying... see: What is The Loan For?

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