Loans: A Basic Guide to Your Options

This guide to loans contains:

• a basic introduction to loans
• outlines your main options
• points out some alternative methods of raising money

Your main choices

When choosing loans, it will be easier and cheaper if you are prepared to:

• bear more risk, and reduce the lender's risk
• make a long-term commitment rather than maintain flexibility
• manage your cash flow so you don't need cashback or payment holidays
• provide financial projections to reassure the lender you can easily repay the loan
• spend time consulting a variety of sources so you can choose the best quote

Risk

The main choice here is usually between secured loans and unsecured loans. For secured loans, you take more risk in order to get a lower APR (interest rate).

If relevant, decide whether your business should be a limited company or partnership/sole trader, the latter involves greater risk for you.

Also, choosing between fixed-rate, variable-rate or capped, can help protect yourself from the impact of interest rates going up and down.

Commitment

Flexible loans give you the option to overpay the loan monthly and/or settle it early with a single payment. Fixed loans commit you to a specific monthly payment; you may be stuck with the loan for a long time, or have to pay significant financial penalties if you decide to pay it off early.

Cash management

Discounts, cashback or payment holidays can help you over cash flow problems, but the interest rate you pay is likely to be higher.

Financial projections

Not all lenders will be interested in financial projections, but convincing your bank manager that you can easily afford the repayments may save you some money.

Who you consult

This is basic common sense of shopping, but getting a number of quotes from banks, lenders, or agents (whether independent or tied) increases your chances of finding something better and cheaper.

Other options...

...for buying something for which you don't have the cash include:

• venture capital (for business only)
• overdrafts
• credit cards
• hire purchase
• mortgages
• personal contract plans (eg: when buying a car)
• contract hire
• rental
• lease
• shop/trade interest-free schemes
• credit clubs

You can also considering restructuring your finance (replacing existing loans with other loans on different repayment terms).