What's in your best interest? Clarifying the secured loan interest debacle

Possibly the first thing that comes into a consumers head when they hear the words ‘secured loan' is ‘how much is the interest?'. This is not surprising: the interest rates on any secured loan are what really make the difference between your loan being a shrewd business investment or an ill-judged financial blunder. All too often, perfectly good rates of borrowing have been marred by an unsuitable type of interest, and the consumer is left wondering where it all went wrong. Fortunately, the types of interest on offer when applying for a secured loan are all pretty simple and easily explained. By following this guide before applying, you should have no problems in finding the loan of your dreams and making it work for you.

Just to really get back to basics, the term ‘interest' in a financial sense is a percentage of an amount of money that is added to the initial sum (usually every year) over a period of time. We all welcome the interest that we receive from our banks that bolsters our accounts. However, when applied to loans, the situation is reversed. The bank charges you an amount to borrow money from it, known as APR. The APR is decided on before you sign on the dotted line, and you should have done your sums to see whether or not you can afford the going rate. If you think you'll struggle, it might be best to start looking elsewhere. But what of the different types of interest available on the market? They vary in quality widely, and you should explore every possible option before deciding on which loan to take.

A fixed interest rate is the most simple of all interest rates for secured loans: it does what it says on the tin. Your interest rate is set in stone before you sign, and will remain so whatever the base interest rate of the Bank of England is set to. This can be good: if the country is going through economic hardship and the interest rates suddenly shoot up, you'll be safe in the knowledge that your loan is protected and you won't be forced to shell out yet more money. Fixed rate interest rates also guarantee that you'll be able to budget effectively from the very start of your loan: if you know you only have two hundred pounds to last the week and pay your loan repayments off, then you'll soon get used to living within your means.

By way of contrast, a variable interest rate on a secured loan means the rate changes with the official base rate. This could of course be fortuitous – if the interest rates go down, then you'll subsequently pay less on your total borrowings. If a country is in an economic ‘boom' period, or in the midst of an extended period of economic growth, then getting a variable rate interest rate can seem like a good idea. But beware the pitfalls – if things start going awry in the world of finance, the Bank of England may well decide to raise interest rates to cut the businesses some slack. The exact calculations done by the Bank are extremely complicated and precise, but you should think of them as simply trying to walk the line between economic growth and high inflation. So pay attention to the financial section of newspapers before committing yourself to either fixed or variable rate interest.

There are some other terms that lenders of secured loans use that you should also be familiar with. A ‘typical interest rate' is the rate offered to 66% of applicants for the loan in question. The rest of the applicants will be offered something else dependent on the personal circumstances. And don't be disappointed if you're not offered the typical rate: many applicants to secured loans actually come out with a better interest rate than advertised, especially if they have particularly large or expensive properties to put up against their houses. In terms of the inverse, a ‘set' interest rate is given to all successful applicants, regardless of their own personal circumstances. Normally, it would be fair to say that set interest rates are somewhat higher than their typical counterparts, usually because the lender is trying to entice people with less-than-perfect credit histories into taking a loan with them. Still, if a loan really is a way to improve your life, then a set interest rate is certainly no bad thing.

There are other factors surrounding interest that are good to know about. If you take a fully flexible loan say, you can actually withdraw money from it after you've paid it back to raise funds if needed. Breaks and ‘holidays' can also be taken from lenders if you take a loan with the right companies. Whatever your personal situation, keep interest in the forefront of your mind.