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You see them on TV, you hear them on the radio, you read about them in the newspapers – loans are advertised everywhere these days. But what does it all mean?

You see them on TV, you hear them on the radio, you read about them in the newspapers – loans are advertised everywhere these days.

What is a loan?

A loan is when you sign an agreement to borrow money from a lender and pay it back (generally with interest) at a later date. Typically, the money is paid back in regular instalments, over a period of weeks, months or years.

There are two main types of loan – secured and unsecured.

A secured loan is where you pledge an asset (normally a car or a house) to the lender in order to borrow an amount of money. The lender then has the security that if you break the contract (fail to make a repayment), they have the legal right to sell your asset (car or house) to get back the money they lent you.

An unsecured loan is not secured against any assets. These types of loans include credit card debts, personal loans and bank overdrafts. Often interest on these loans are high, so you will pay back the money borrowed, and a percentage of it on top.

APR is a term that you will hear often in loan adverts. It stands for Annual Percentage Rate and gives you an idea of how expensive the loan is. You can use it to compare different credit and loan offers. The APR includes important factors such as the interest rate you must pay, how you repay the loan, the length of the loan agreement, frequency and timing of instalment payments, amount of each payment and certain fees associated with the loan. Generally, the lower the APR, the better deal you are getting.

For more information about managing your money, check out whataboutmoney.info.