In general terms finance is where you borrow money, and pay interest on top, paying it back over a period of time. Along the route you may want to pay it back earlier. This page looks at the options to pursue and any areas where you can save money in the future.

Personal Loans

This is money lent to you individually or perhaps with a partner, direct with your Bank is the easiest and cheapest route, other finance companies may well change higher rates and include heavy penalties for early repayment.

Whether you qualify for a lower rate loan is determined by your status, based on credit history, it's well worth trying to get the best rate you can, especially if you plan to pay off the loan earlier. Shop around and study early settlement conditions as vital as interest rates.

Loans from retailers are often dearer and entered into on impulse without study of the terms especially early repayment. Look for cooling off periods and ask to pay by other means and cancel a credit agreement you later find onerous. Retailers and salespeople often earn high commission or expensive credit deals which cost you dear.

Hire Purchase

Money lent and secured by the goods bought, normally motor vehicles and business plant or equipment, and not for lower value goods.

Some deposit is usually required, or several months advance payments. Since goods bought depreciate rapidly terms of loan are usually a few years only 1-5. 

Basically you fail to pay the instalments and the finance company can repossess the goods and sell them to repay your debt. Hanging on heavy charges on top which means in the main there is little chance of getting any surplus after sale, although in theory the buyer pockets what is left. Customers have little control over the sale of goods and the finance company may show a loss. Some agreements allow the finance company to pursue the customer for any shortfall, so watch small print that allows that.

Mortgage

Secured on property of all types, with varying rates based on term in years and credit status

Loan is repaid less other costs on the eventual sale of the property. There may be penalties for early settlement usually within the first 1-4 years of the agreement. Setting up a loan of this type may incur valuation and legal fees and some lenders cover this themselves, hence early settlement penalties which seem fair and reasonable to add as a condition.

If your status is poor a secondary form of lender can grant mortgages based on property values alone, but interest and early settlement penalties may be more severe.

2nd Mortgage

Property owners can raise additional funds by borrowing against the "free equity" value of their property which already has one main or "Ist Mortgage" normally with a Building Society. Several 2nd mortgages can be obtained subject to equity values.

Interest rates are higher than Ist Mortgages and can be higher than Personal Loans for good credit status bank customers, in the main these finance plans are easy to arrange being secured, but can carry heavy early redemption penalties.

An alternative is to approach an existing 1st Mortgage provider for a "top up" loan or consider a remortgage where you take out a new mortgage larger than the current one. Rates may be higher to remortgage than if you used a mortgage to finance a new property.

Check List when borrowing

• Personal Loan or Secured? avoid secured loans if you can be they do usually provide better rates as the lenders risk is reduced.

• Interest Rate - fixed or variable - helps know where you are in the future and ideal if you can fix low rates, better to be variable when rates are high.

• Term of loan - repay as soon as you can comfortably afford

• Penalty for early repayment - a % of the loan, x months interest charges as well as legal and admin fees, can be high, so check before taking the loan.

• Notice required for early repayment, you may not be able to settle with several months notice.

Penalties for missed payments (varies with lender)

• A charge for letters to tell you about arrears

• Right of lender to take you to court

• Bad credit history by falling behind with payments

• Charges for expenses added to loan

• Court fees

• Higher interest rates

• Right of sale of secured property

• Loss on sale of property charged against you

What reasons allow you to claim against the lender by way of refunds?

• Errors with payments been missed not your fault

• Errors in crediting your account with payments made

• Proof that sale of secured property was at silly price, meaning you lost out on surplus or where charged for losses

In summary watch the deal on offer when you borrow money and keep accurate records especially if you have problems paying the installments. Talking to the lender early in the event of money problems can save penalties and costs which otherwise will make matters worse, not better.

Some useful web sites 

FIND - Financial Information Net Directory

The IFA Association

IFA Internet Centre

British Insurance and Investment Brokers' Association BIIBA

IMRO - UK regulator of the financial services

The Economist

Electronic Commerce Association

Financial Times

see also our page on Banking