![]() ![]() This rate is charged on the principal amount you borrow. Interest rate: An interest rate is the cost you are charged for borrowing money.When taking out any loan, it’s important to understand these four factors: Common types of unsecured loans include credit cards and student loans. Unsecured loans don’t require collateral, though failure to pay them may result in a poor credit score or the borrower being sent to a collections agency. In exchange, the rates and terms are usually more competitive than for unsecured loans. Common examples of secured loans include mortgages and auto loans, which enable the lender to foreclose on your property in the event of non-payment. The affordability should be assessed by calculating loan repayments and comparing to available income after other expenses have been deducted.Secured loans require an asset as collateral while unsecured loans do not. Before taking out any loan the terms of the loan should be understood. It is always a good idea to be certain that a loan is affordable before taking it out. Alternatively, it may just mean that any loans available are more expensive to reflect the risk of non-payment. A very bad credit rating could mean that no money at all can be borrowed. ![]() That could mean that buying a house, car, washing machine or anything else is more difficult. ![]() Therefore, a bad credit rating can make it difficult for you to borrow in the future. ![]() Your credit rating is what lenders use to determine whether they should lend money to you. If your loan is secured on your house, the lender could seek to recover your debt via a forced house sale.įor both secured and unsecured loans, failing to make your repayments can harm your credit rating. If you persistently miss payments and you break the loan agreement the lender could pursue you to recover the money you owe to them. If you cannot afford the loan this fee can add to financial problems. If you miss a payment the lender is likely to charge you a fee. When taking out a loan you agree to pay back the loan amount plus interest in accordance with the repayment schedule. Their hope is that interest payments will fall over time due to falling interest rates. In this case they will take out a variable rate loan. Other borrowers might prefer to gamble that interests will fall. They accept that their repayments might increase at a later date. Lenders charge a higher rate of interest on fixed rate loans than on variable rate loans.Ī borrower who is not worried about their repayments increasing due to an interest rate rise may prefer the cheaper variable rate loan. This shifts the risk of an interest rate rise to the lender. If a borrower worries that their repayments might become unaffordable they can choose a loan with a fixed interest rate. This means there is a risk that loan repayments can become less affordable if interest rates rise too much. Over the course of the loan, if interest rates rise then so will loan repayments. When taking out a loan a currently available interest rate is used to calculate future loan repayments. On the other hand, rates might go down to help the economy if there is a recession. If wages, shopping prices and house prices are going up quickly the Bank of England might raise rates to prevent inflation. ![]()
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