Everything you need to know about bad loans

Types of bad loans

Personal loans

This is the most common type of loan and involves borrowing between £ 1,000 and £ 25,000, repayable over one to seven years. The interest rate is normally fixed, which means you know exactly what you’re paying back. For example, if you borrow £ 5,000 at an interest rate of 40% over three years, the monthly repayments would be £ 224, for a total repayment of £ 8,054.

Guarantee loans

These work the same way as personal loans, but also involve an agreement with a third party, usually a family member or friend (guarantor), to ensure repayment of the loan. If you don’t repay, the guarantor can be held liable and sued for the debt. If you have a bad credit history, this may be the only way to borrow.

Homeowner loans

These are different from personal loans as they are secured on your home. This means that you can often borrow a much larger amount of money. But it also means that the lender can repossess your home if you can’t afford to pay it off – so this type of loan is much riskier. Interest rates are normally variable and the repayment period can be up to 25 years.

Installment loans

Personal or surety loans can also be referred to as “installment loans” because you pay back the money in installments over a period of time.

Logbook loans

With this type of loan you secure the loan against your car. In effect, you are handing over temporary ownership of your car to the lender, although you can still use it.

When you take out a logbook loan, you sign a credit agreement and a “bill of sale”. If the lender registers the deed of sale with the High Court, they can take possession of your car without a court order. This can be the case if you don’t pay off your loan on time.

Logbook loans can be very expensive with APRs of up to 400%. You risk losing your car if you cannot pay off the loan as agreed.

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