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How to run a loan comparison: understanding loans

Choosing the best loan for your financial circumstances can be made simple. We’ve broken down all the important information about loans to help you understand what a loan is, how to use a loan, and compared different types of loans.

What is a loan?

In basic terms, a loan is an agreed amount of money that is given from one party to another, with an agreement that the recipient will repay the value after a set time.

There are lots of types of loans available. Large loans, such as mortgages, can be used to finance the purchase of a house. Whereas personal loans could range from a few thousand to tens of thousands.

When you’re approved for a loan, you’ll sign an agreement about how you will repay what’s loaned to you, when the final repayment will be made, and the amount of interest you’ll pay on top of the loan.

What do you need a loan for?

A loan can be used for a wide variety of purposes, and few have restrictions on what you can spend the money on once it has been approved. Although you should check your loan agreement to see if your loan has any restrictions.

There are some loans that are granted for specific purposes, such as a mortgage, student loan, or business loan. Others have more casual agreements, and can be used for:

  • Home Renovations
  • Debt Consolidation
  • Holidays
  • Weddings
  • Motorhome Purchase
  • Car Purchase

The most important thing to think about before you apply for a loan is whether the commitment to repayment is worthwhile and affordable. If you’re thinking of applying for a loan you know you can’t afford to repay you might want to consider alternative forms of payment (such as savings) before committing to a loan.

When to get a loan?

Choosing when to apply for a loan might involve some careful thinking about your financial history, current circumstances, and future security. This means understanding exactly what repaying a loan will mean for you.

Firstly, you may want to consider whether applying for a loan is the right choice for you and see if there are alternative ways for you to find funds. If the expense isn’t strictly necessarily could you wait and save up for it?

If you’ve decided that you absolutely need a loan, make sure to compare loans to find the best deal. Think about the amount of interest you’ll be expected to repay and finding a repayment plan that you feel certain you can stick to.

Finally, if you want to avoid any marks against your credit history, consider applying for a soft search loan. This will allow a lender to see if you are eligible for a loan without marking that you have applied for one before you commit to anything.

Understanding a loan

Loans from a provider, rather than a friend or acquaintance, will almost always come with terms and conditions, along with fees and interest that need to be repaid on top of the original loan amount.

Exactly what fees and interest you’ll need to repay will be laid out in full in your loan agreement and should be read thoroughly before you sign and commit to the loan. The interest can be fixed (meaning it doesn’t change), or variable (which means it might be higher or lower month-to-month).

Secured vs Unsecured

Choosing between a secured and unsecured loan is one of the most important decisions you’ll have to make when applying for a loan. Here are the essentials you need to know:

Secured Loan:

A secured loan refers to what a lender is guaranteed as security against the loan if you can’t meet repayments. This might be your home or car, which means that if you don’t make repayments, it could be repossessed by the lender. The benefits of a secured loan are usually lower rates of interest and larger loan amounts. However, the drawbacks mean that if you struggle to repay at any point, your possession(s) could be at risk.

Unsecured Loan:

An unsecured loan doesn’t require any security. This means that you have greater security if you don’t make repayments, as your home won’t be used as collateral. This does often mean that interest rates are higher, and you usually can’t borrow as much. Please remember that if you fail to meet repayments, the lender can still take you to court, and you might incur additional fees.

Other options

If you’re not sure that a loan is the best option for you, there are alternatives available. They won’t work for everyone, but consider these options before committing to a loan:

Savings

If you don’t need to purchase the item or service straight away, it’s certainly worth considering if you can save up for it instead. Look through your last three months of transactions and figure out how much you could realistically afford to save in a dedicated savings account each month.

Borrow from a friend or family

Not everyone is able to do this, but if you have a friend or family member who can fund your transaction it’s always worthwhile asking them to lend you the money. If they agree, consider setting clear repayment expectations before they give you the loan and be honest with them if you think you might struggle to pay them back.

Authorised overdraft

There are usually fees attached to using a bank overdraft, but they might be less than you’d need to pay for a loan. Never rely on an authorised overdraft regularly, but in case of emergencies and unexpected bills, they can be helpful. Speak to your current account provider to find out how to arrange one.

Credit card

A credit card can be a useful financial tool if you remain vigilant about repayments. Many new credit card accounts offer interest-free periods, which could help you to finance a large purchase without the need to pay additional fees. To avoid spiralling into credit card debt, think about paying as much as you can every month, and only use the credit if you know you can afford to repay it as quickly as possible.

We have a guide that breaks down the differences between mortgages, credit cards, loans, and overdrafts in more detail.

If you’re ready to apply for a loan, why not fill out our online application today.

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Whether you're planning on some home improvements, replacing your car or simply getting your finances in order, a loan from Freedom Finance could be more affordable than you think. Use our calculator above to find the ideal loan for you. All quotations given are for illustrative purposes only. Credit subject to status. The rate you are offered will depend on your personal circumstances, credit assessment procedures and other related factors.