There are so many different types of loans that it can be confusing deciding where to start looking. Going for the wrong types of loan can also cost you more or prove to be too high risk. Depending on what you need the money for, and for how long, will often determine the type of loan you should apply for. We tried to decide – what are the different types of loans?
Generally speaking, loans fall into 2 categories. Secured Loans and Unsecured Loans. Let’s take a look at how the two types of loans differs. And also which may suit you according to your individual circumstances.
Secured Loans are loans that the lender insists you attach an asset to. In the event you are unable to pay, the asset can pay the balance of the loan instead. This allows more competitive rates for the borrower. However it also brings with it risks, as you can lose your asset that is secured to the loan should you default no payments.
Unsecured Loans do not have anything attached and so you just pay back the loan, usually, in instalments. You will not lose an asset should you fail to make payments on time. However, there are still penalties should this occur. Here we look at some of the main types of Unsecured Loans and how they can help you depending on your needs.
A short-term loan refers to an amount of money borrowed and repaid in less than 12 months. With short term loans being for smaller, unsecured amounts, they attract a higher interest rate which is governed by the APR.
A same day loan is another name we use for our short term loans, as the cash is normally sent the same day the lender approves the loan.
Payday loans are loans of up to £1,500 paid into the customer’s bank account to tide them over until their next payday. Always bear in mind payday loans are expensive and could even make your financial situation worse if you don’t pay it back on time.
A guarantor loan is underwritten with a third party attached to the loan. In the event you are unable to make the repayments the third party becomes responsible for this. This will usually be a family member or friend. This type of loan is usually for people with bad credit as lenders are more likely to approve credit for a loan with a guarantor. Bad Credit Guarantor Loans are usually for a higher amount and a longer-term than a Bad Credit Pay Day Loan.
These loans usually come with higher interest rates to offset the higher risk. These loans are usually for people who have a bad credit history (or no credit history at all) and struggle to obtain credit elsewhere. Sometimes called Credit Builders these loans can help people improve or start their credit history to make it easier and cheaper to borrow in the future.
Log book loans are a type of secured loan. Lenders secure credit against your vehicle and mean the loan company will own your vehicle until the loan is repaid. Having a log book loan does not mean you have to stop using your vehicle. However, if you fail to make the repayments the loan company may repossess your vehicle.
Once you have decided that borrowing is the only option for you, there are many things to consider.
The most important factor when considering a loan is working out exactly how much you need and stick to it. As tempting as it may be, only ever borrow what you need to make sure you pay back only what is necessary.
If you think about it, taking a loan is the same as any large purchase so it always pays to shop around. Compare things like the APR (Annual Percentage Rate), the Total Amount Repayable, and any other charges or fees. For example, taking a loan for a shorter amount of time may have a higher APR, but when you add up all the repayments the total amount repayable may be more. At the same time, taking a loan that has a smaller Total Amount Repayable may have larger instalments to pay back each month so it does depend on your circumstances and needs.
Always check the small print and eligibility criteria before applying. Sometimes the headline APR advertised is only offered to a small number of customers, especially if you are applying with a bank who offer preferential rates to their customers. Some companies now offer a pre-check that can give you an idea if you will be accepted before applying and so not leaving a footprint on your credit file.