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Guide to understanding loans

Unless they are perfect when it comes to financial management, or committed to tight savings, just about every person has to turn to borrowing money at some point in their lives. Taking out loans need not be an intimidating and confusing experience – millions of people are carrying a debt to a bank or loan provider quite comfortably. It is, however, important to fully understand how different types of loan work and learn where the best deals can be found.

When it comes to borrowing from a bank or specialist provider, there are two common and clear types of loan available in the UK – secured and unsecured. A secured loan is often used by people looking to get hold of a large amount of cash relatively quickly. They are often used for big home improvements or to buy a new vehicle but can be used for just about any big purchase.

This type of loan is 'secured' against a major asset belonging to the borrower – typically their home. This means their house could be taken away from them by the lender should they fail to keep up with repayments on the loan – their property is acting as 'security' on their ability to pay the money back. The advantage of this kind of borrowing is that it can usually guarantee a larger sum of cash. The obvious downside is the possible loss of a person's home if they cannot pay the loan back.

Secured loans are not as common in the market as they once were, and this has been linked to a fall in house prices. If a home's price is falling, so is the amount of security which is backing the borrowed money, and some providers which once leant secured cash have suspended operations altogether, although many others continue to trade. Interest rates have tended to be higher on some secured lending products due to the shrinking of the market.

Unsecured loans might initially sound not such a safe bet thanks to their title, but in reality they involve less risk to the borrower as they are not secured against an asset such as a house. They also usually involve a smaller amount of cash available and attract higher interest rates due to the fact they are not secured against a property.

Provided lower rates are still available with secured borrowing, this could lead to lower monthly repayments than with cash which is unsecured, allowing for clear budgeting throughout the longer life of the loan. However, secured borrowing over a long period of time can often lead to the customer paying out more in interest overall.

Interest rates in general are the key to finding the best borrowing deal. However, care should be taken as initial rates offered by some providers can appear attractive, but rates which may kick in later on in the payment plan may be less rosy. Some offer an initial period where none of the cash is paid back at all, but rates when the payback period kicks in could be very high.

Although borrowing is a fact of life for many people, this doesn't mean they should go for the first type of loans that are offered to them perhaps by their bank or other existing financial provider. Various rate deals and plans are available on secured and unsecured products and a thorough search could pinpoint a better deal.