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The different types of borrowing.

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Introduction

The different type of borrowing There are 3 term of borrowing: * Short Term * Middle Term * Long Term 1. Short Term ---Friend and Family Advantage: You can borrow money from your parents, sisters, brothers and relation easily. Disadvantage: You can only borrow small amount of money. 2. Middle Term ---Bank personal loan What is personal loan? It means a personal loan is money you borrow from a financial institution - for example a bank or a building society. Advantage: Personal loans are available in varying amounts with different rate which usually depend upon the purpose for which you require the loan. Disadvantage: Unsecured personal loans are usually more expensive than homeowner loans as the lender doesn't take a charge on your loan. In other words you do not guarantee your loan with your home. How do they work? You borrow an agreed sum of money for an agreed length of time (normally anything from 6 months to 10 years or more). The lender makes money by charging interest on the loan. The interest rate can be either fixed or variable. The Headline Interest Rate This is the interest rate you'll see quoted in the adverts and best buy tables. Basically you shouldn't take it too seriously. It's a means the lenders use to attract enquiries. The interest rate they offer you may well be different because of your personal credit score. Headline rates are usually expressed as a monthly interest rate. However, you should always compare loans using the Annual Percentage Rate (the APR). The APR The APR (Annual Percentage Rate) is a method of providing a true comparison between different loans. It shows the true interest rate of the loan. The lower the APR on a loan the better because it means you have less interest to repay - so the loan is cheaper. The APR is worked out according to strict legal guidelines and takes all the costs of the loan into account. ...read more.

Middle

* Cashing in the plans early may result in financial penalties. These will be provided for in the initial agreement. In addition the lender has no way of tracking some of the more modern repayment vehicles, such as an ISA, which will result in some instances where a borrower lets an investment lapse forgetting or not realizing it is to be used to pay off the mortgage. This will result in situations where there is no method of paying off the mortgage and the lender will only become aware at the end of the mortgage term. INTEREST RATES ON MORTGAGES When you have chosen the right mortgage for you, whether it be a repayment or an interest only mortgage, you will need to consider the 4 main mortgage rate options available. * FIXED * CAPPED * DISCOUNT * VARIABLE Fixed Rate Mortgage The amount you repay the lender each month can be at a fixed interest rate for a certain period of time, regardless of the interest rate in the market place. It is common for lenders to offer rates fixed for a period of 2 to 5 years, but shorter and longer periods can be found in the market. At the end of the fixed rate (or 'benefit') period the rate will normally convert to the lenders Standard Variable Rate (SVR). It is normal for lenders to charge up-front fees in the form of booking and/or arrangement fees. In addition lenders frequently apply an Early Redemption Charge (ERC) for fixed rate mortgages. This acts as a 'lock-in' making an often heavy charge for borrowers paying off their mortgage early. Watch out - the ERC can sometimes last longer than the fixed rate period e.g. a 3 year fixed rate with a 5 year ERC. Capped Rate Mortgage A capped rate mortgage is very similar to a fixed except that if the variable rate drops below the capped rate, the borrower will make payments based on the lower variable rate. ...read more.

Conclusion

depending on the lender and scheme. With 'No Redemption' mortgages you will not have to pay this redemption fee (although there may still be other costs such as sealing fees and legal fees.) As a consequence of not being 'locked-in', the rate offered on these schemes will usually not be as competitive as for mortgages with redemption penalties, making them most suitable for those who are likely to keep track of current rates and wish to remortgage quickly if they find a better rate, or those who may have to repay their loan in the first few years. No Overhang Selecting the 'No overhang' option means that the mortgage schemes on screen will allow you to repay the loan without penalty once the benefit period has ended i.e. the mortgage does have an Early Redemption Charge but it does not last longer than the fixed, capped or discount period. This means that a mortgage with, for example, a discount to 31st January 2006 will have a redemption charge to either the same date or a date prior to this. The Early Redemption Charge can represent a significant sum although the amount will differ between lenders and between products. With 'No overhang' mortgages you will only have to pay this redemption fee if you redeem the loan or remortgage whilst you are still subject to the scheme's special rate. Once you have reverted to paying the lender's Standard Variable Rate (SVR) you will be able to redeem the loan without penalty (although there may still be other costs such as sealing fees and legal fees.) As a consequence of not locking-in the borrower to the lender's SVR, the rate offered on these schemes will usually not be as competitive as for rates with redemption overhangs, making them most suitable for those who wish to benefit from a lower initial rate without needing a very low initial rate, and who are likely to want to remortgage to another Discount, Fix or Cap once they are no longer benefiting from the initial rate. ...read more.

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