Jargon BusterLoan Jargon Demystified!There is a lot of complicated jargon in personal finance in general and secured loans and loan consolidation in particular! We have provided this basic jargon buster to help you get started. Please note these can only be very general comments as different loans work in different ways. You must always get the appopriate advice when making financial decisions. This website in no way constitutes giving advice. Loan Consolidation Loan Consolidation basically means getting one new loan and settling all your existing loans. This bascially has two advantages:
A loan given in exchange for security is called a secured loan - this basically means that if you buy something like a house with a secured loan, then the lender can have confidence that he can get his money back because the loan is secured on the house - ie if everything goes wrong he sells your house to get his money. The advantage is that this often gives you a cheaper loan (ie a lower interest rate) than an unsecured loan. The disadvantage of course is that your house or other security may be at risk! In the UK we usually refer to them as a mortgage. Unsecured loan This is the opposite of a secured loan. The lender takes all the risk as he has no way of guaranteeing that he will get his money back. Consequently he charges a higher interest rate to cover this additional risk. Swapping an unsecured loan for a secured loan can be good to keep costs down - but possibly not if there is a risk of you not paying it back and so putting your house at risk! Interest rate This is the price for borrowing the money from the lender. The lender could invest his money elsewhere, but as he is giving it to you for a period of time he wants to get a return on it to cover the return that he could have got elsewhere, plus of course the risk that he doesn't get his money back at all! Compound interest This is almost magic! If you are a saver then it is wonderful - if you are a borrower it is bad news! What this means is that over time interest is charged (or earned) on the interest already charged (or earned) - ie if last year £100 interest was earned, then this year if everything else stayed the same then in addition to the £100 earned for this year, you would earn interest on the additional £100 from last year - so at 3% this would be £3. So in year one you earn £100 but in year two you earn £203 and so on...this is great when it works in your favour, such as investing in a pension plan. It is very expensive if you owe money - so paying off the current interest on a loan is essential to stop your debt increasing further. Monthly payments This is the amount paid each month towards the loan - probably most of it is going to paying off the interest charged for that month and then any excess pays off some of the original amount borrowed. Typically over time the proportion going on interest reduces and the amount paying off the original loan increases even though the monthly payment stays the same.
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