Understanding Loan Terms

Taking out a loan can be a confusing business, particularly if you’re being bombarded with terms that you don’t understand. To help you get the best deal, here are a few of the loan terms that you’re likely to run into. 1. APR and TAR: The Annual Percentage Rate (APR) is one of the most important things to look out for when choosing between loans – it represents the interest that you will have to pay back on the money you borrow. You should also ask for the Total Amount Repayable (TAR), which will tell you the total cost for your credit over the term. The TAR that you are charged will depend on the provider, your credit rating, and the amount you borrow – to find the best rate on loans, shop around with providers such as HSBC, or visit a price comparison site like Beat That Quote. 2. Early repayment penalty: If you think that you might want to pay back your loan before the end of the term, check to see that this will not incur a penalty. Many providers do exact penalties for early repayment, and this can make a significant difference to the overall cost of the loan. Look at flexible loans only if possible, which will enable you to make overpayments without penalty. 3. Secured and unsecured loans: If you take out a personal loan, it will be either secured or unsecured. Unsecured loans are based solely upon your personal credit rating and your income, which means that the maximum borrowing amount is normally around £25,000. They also tend to involve more expensive repayments than secured loans, which are taken out against the value of your property. However, if you default on your repayments for a secured loan you could end up losing your home. 4. Payment Protection Insurance (PPI): Most loan providers will also offer a PPI policy, which will protect your repayments in the event of accident, sickness or unemployment. Think carefully before taking out this kind of insurance – it can add thousands to the cost of a loan. If you think it may be necessary then find out about the cost of a standalone PPI policy before taking one out with your loan provider. 5. Fixed and variable rates: Loans are either on a fixed or a variable rate. The advantage of a fixed loan is that you will know how much your repayments will be for a specified amount of time, which will allow you to budget appropriately. You should only opt for a variable rate loan if you can afford higher repayments in the future, since the cost could go up if interest rates increase. With any type of loan, you should plan and budget carefully before committing yourself to the repayments.