A beginner’s guide to loans

It can be hard to quantify exact and up-to-date lending statistics in the UK, but it’s thought that some 6.3 million Brits took out a personal loan in 2017.

What’s more, 59% of British adults have previously taken out a personal loan between the value of £5,000 and £20,000, while this percentage could well increase as the UK’s cost-of-living crisis continues to wreak havoc.

But what exactly is a loan, and does the process of borrowing money actually work? Let’s find out.

What is a loan and how does it work?

A loan refers to the lending of money by an individual or institution, usually to individual customers or organisations who meet their borrowing criteria.

The recipient of the loan subsequently incurs debt to the value of the loan and agreed interest repayments, while the total amount of cash repayable must be repaid within a predetermined timeframe.

People may borrow money for a number of purposes, but in general terms, this provides an accessible source of cash that can cover expansive costs such as remodelling your home or driving business growth.

There are two primary types of loan; namely secured and unsecured. The former enables you to borrow larger amounts of money at a lower rate of interest by using your home as similar asset as collateral. Conversely, unsecured loans require no security at all, although lenders will charge higher rates of interest to help offset their increased risk.

What can you use a loan for?

You can also apply for personal and business loans, depending on how you intend to use the capital at your disposal.

For example, you could borrow a fixed amount of cash to help pay for your wedding. Conversely, you can apply for a business loan to launch a new commercial venture, or reinvest in an existing company to drive continued growth.

You may also apply for secured loans to buy a new home or car. When buying real estate, this type of arrangement is referred to as a mortgage and will automatically establish the property as collateral.

In some cases, you can borrow money from specialist lenders to help consolidate your debts. This enables you to settle your existing debts and simply repay the outstanding loan with a single monthly repayment, and it makes managing your finances considerably easier over time.

How can your borrow money?

As the financial market has continued to evolve in the age of fintech and against the backdrop of various economic crises, we’ve been able to borrow money from a larger and more diverse range of lenders.

So, in addition to borrowing from banks and building societies, you can now access funds through peer-to-peer lending platforms, supermarkets and even specialist lenders depending on your needs.

Credit unions can also provide loans, while you can sell your unwanted goods to pawnbrokers to raise funds quickly and efficiently.

The key is to find a pawnbroker who lends capital based on the value of the items sold rather than your credit score, as this ensures that you achieve optimal value for your hard-earned cash.