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Information on Loans

While there are many different types of loan available which can be used by borrowers for a range of different purchases, loans can be categorised into two types, secured and unsecured.

Secured loans

 A secured loan means that a borrower must guarantee an asset as collateral in the case that the loan cannot be repaid. The asset used as collateral must be something of financial value such as a car or more commonly property.  A mortgage loan is probably the most common of secured loans and it is used by most people when purchasing property or real estate.  A mortgage is usually borrowed from a bank or building society and they are given a lien which is a form of security interest on the deeds to the house until the mortgage debt is repaid. If a borrower defaults on repaying the mortgage the lender will legally be able to repossess the property and sell it in order to recover the debt.

In other cases the collateral for a secured loan might be a car or a possession of similar value.  In the same way as a mortgage, if you cannot repay your debt you stand the risk of losing whatever possession you use as collateral so make sure you can afford an unsecured loan before you borrow. For UK View www.whichwaytopay.co.uk

More common day to day borrowing is generally done through unsecured loans.  Credit cards, bank overdrafts and personal loans are used by most people every day and any line of credit which you accept and use which does not need any collateral as security is essentially an unsecured loan.  In order to make unsecured loans profitable for the lender the interest on unsecured loans is often higher than on a secured loan.  Lenders of unsecured loans take higher risks when lending as they have no security on their loans. If the borrower defaults the only way to recover the money lost is through a legal process and this is cumbersome for the lender.

There are other options if you are looking for loans for people with bad credit.  Some companies will offer secured loans of up to £25,000 providing you can offer either your home or car (provided its value equals that of the loan) as collateral.  If you have bad credit this sort of loan may come at a slightly higher level of interest than usual but be sure to shop around. If you can offer a valuable asset as collateral for the loan then most risk is averted by the loan company and they should have to charge you too much interest in order to cover this risk.

Can those with bad credit obtain unsecured loans?

If you are looking for an unsecured loan and you have bad credit then you your options are more limited.  This is because lenders do not want to lend to people who have poor credit history. A poor credit history is likely to mean that in the past loans may have been defaulted upon and this can affect your credit score for a long time. If you have bad credit and you are looking for an unsecured loan there are realistically two options; credit unions and payday loans.

What is a credit union?

A credit union is a financial cooperative whose aim is to provide credit and other financial services at a cheap rate to its members. A credit union is different to a bank as the members of the credit union cooperative own the credit union. Credit unions are democratic in that the board are elected by a one person to each vote electoral system no matter how much money the member has contributed.  Credit unions tend to be community orientated and while it is necessary for them to generate profit they are usually considered to offer the fairest deal they can to those seeking a loan.  However, not everyone can go to a credit union for a loan. It is often necessary to be a member of a credit union in order to borrow from the union.

If you have bad credit and you are not a member of a credit union but you are seeking a loan then a payday loan could be an option for you.  Payday loans are widely disliked as they tend to have extremely high interest rates on small amounts of money.  Payday lenders can usually lend sums of £80 to £1000. However, if it is the first time you are going to a particular lender then around £400 is the largest amount you are likely to be able to borrow.  Interest on payday loans is high because payday loans are usually aimed at people with bad credit.  This means that payday lenders take on a greater risk when they lend and have a higher proportion of defaulters than other lenders such as banks or building societies.

The representative APR on payday loans is usually extremely high but it is important to bear in mind that you should only be borrowing for a maximum period of 30 days. The whole purpose of a payday loan is that it can tide you over in an emergency such as avoiding unauthorised overdraft fees from your bank or when there are important bills to pay. Most payday loan companies can put money into your account extremely quickly so this also makes them appealing for those in need of emergency cash.

If you are considering a payday loan then make sure you compare a range of companies as the rates offered will vary.  Please make sure that you can afford any loan which you take out. Work out exactly how much you need to borrow and how much you will have to pay back. Even if the payday loan company allow your loan to roll over into the following month it is best not to do this as the interest can start to spiral out of control.  Payday loan companies are also notorious for hidden charges and fees so make sure that you read all of the terms and conditions in detail.

Although there are some payday loan companies which offer a good service it is important to realise why the industry has a bad reputation so that you know what to look at for if you are purchasing this sort of loan. Click here to compare payday loans.

Payday loan companies have been accused of preying on those who can least afford the interest on these loans. In some ways this is true as those with bad credit tend to earn less money than those with good credit. However, if banks won’t lend to those whose credit history is poor then there is little alternative available for those in need of emergency cash. Having said this there is no excuse for the aggressive advertising campaigns used for payday loan promotion which encourage people to borrow larger sums than necessary and promote the way in which loans can be rolled over each month.

Despite all of the bad publicity surrounding payday loans it looks like they are here to stay for the time being.  If banks will not lend to a large portion of society then it is inevitable for people to seek loans elsewhere.  Although regulation in the payday loans industry is considered by many to be too relaxed, without payday loans it seems likely that people in desperation would be driven into the arms of totally unregulated loan sharks.