As you may or may not know there are several types of loan on the market. So here at Moolr we have put together a quick breakdown to help you understand the difference between them. Loans allow you to borrow a fixed amount of money and repay it in equal amounts. The borrower does this over a set period of time, normally at a fixed interest rate. How much you can borrow and the interest rate you will be charged will depend on the type of loan. Other factors are your personal situation and your credit score. We ask: what are the different types of credit loans?
A personal loan comes in all sorts of shapes and sizes. Personal loans are also known as unsecured loans because you don’t have to use anything as security for this type of loan. The offer of a loan is based on the information held in your credit report. Plus some personal details in your application.
Lenders sometimes label personal loans for specific purposes. For example, a “car loan” is a personal loan for the purpose of buying a car. But this is just a way for lenders to market their products. It does not necessarily mean it will be the best way to borrow money. If you are borrowing money for a big purchase, it is a good idea to take the time to look at all the options.
You can normally borrow between £1,000 and £25,000 with an unsecured loan. You will pay an interest rate of somewhere between 3% and 30%, and you will have to repay the loan in one to seven years.
Lenders charge different interest rates depending on how much you want to borrow. These are known as “tiered interest rates”. If you ask your lender about them, you can sometimes save money by borrowing just a few pounds more and getting up to a higher tier. Unsecured loans usually have higher interest rates than “secured” loans. This is because they are riskier for the lender. However, they are less risky for you.
A secured loan is money that you borrow secured against something that you own. If you don’t repay the loan, the lender has the right to take the asset you put up as security. Most secured loans are secured on a property you own, i.e. your house. This is why secured loans are often known as “homeowner loans” or “second mortgages”. To take out a loan secured on your home you will need sufficient equity in the property. Equity is the difference between how much your house is worth, and your outstanding mortgage. As well as the equity in your property, lenders will also look at your borrowing history. Borrowers tend to use secured loans to borrow larger sums of money than personal loans. You can normally borrow between £5,000 and £100,000 with a loan secured on your home. You will pay an interest rate of about 4 to 10% and have up to 25 years to repay the loan.
Taking out a loan secured on your home comes with an obvious risk, as the lender has the right to repossess your house if you do not repay the loan. There are other types of secured loan as well those secured on your property. It is possible to secure a loan on your car, and these loans are known as “logbook loans”. Another example is a “pawnbroker loan”. Pawnbrokers accept items such as jewellery and gadgets as security for a loan. But as these items are worth less than a house, you will not be able to borrow a large amount of money and the interest rate could be considerably higher.
Payday loans are short term loans designed to be paid back within 28 days – i.e. your next payday. Lenders charge a fee instead of advertising an interest rate. You might pay £25 to borrow £100 for 28 days, and so repay £125. But if you miss a payment or can’t repay the loan you will be charged more money. This means payday loans can work out to be quite expensive.
A debt consolidation loan is designed to help you if you are struggling to pay a number of debts to different lenders by moving all your debt into one place. The main benefit of a debt consolidation loan is that you will have one monthly payment to make instead of several. Depending on the interest rate, it can also lower the amount you repay each month. Be careful though. Your monthly payment for the debt consolidation loan might be lower than your previous payments added together. But if the debt consolidation loan is repaid over a longer-term it could mean you pay more interest in total.
If you have a low credit score or don’t have a credit history at all, you may struggle to get a loan from a bank or building society. But you could be eligible for a bad credit loan from another lender. You will pay more interest with a bad credit loan. Also, a lender may ask you to offer security for the loan. This is because lenders will look at your borrowing history and judge you as “high risk”.
Another option if you have a low credit score, and that is a guarantor loan. This means you will need to ask someone else – the “guarantor” – to agree to be responsible for paying the debt if you can’t. The guarantor will need to have a good credit history and will usually be a parent, another member of your family or your partner. You will pay quite a high interest rate with a guarantor loan, normally between 40 and 50%, but if you repay it on time, your credit score will improve.
So, if you are in need of some amazing credit loans UK then make sure to get in touch with Moolr today or enquire through our contact form here.