Types Of Loan
Loans are available for any purpose, so if you are wanting to buy a new house or holiday home, purchase a new car, do home improvements or repairs, to pay for a wedding or holiday or consolidate your existing debts you will probably be looking at what loan to apply for.
There are many different types of loans available nowadays from a range of financial institutions. Each loan is aimed at different people in varying circumstances. It can be confusing knowing which is the best option for you. This guide should help explain the differences between each loan type.
Unsecured Loans
Also known as personal loans. These loans are aimed at people who do not have any collateral, usually tenants. Because there is no asset involved, these loans are based on the applicants income and their credit history. Often unsecured loans have a higher interest rate than with secured loans.
Secured Loans
Also known as Homeowner Loans or home loans. It is a loan specifically designed for people who own their home or have a mortgage on a property. A secured loan is less risky for the lender as the property is used as collateral, so if the borrower cannot keep up with repayments, the house can be repossessed and sold to repay any outstanding debt.
Payday loan
These are a fast, short term loan for small amounts, usually less than £1000. They are designed to cover you if you are a bit strapped for cash before your payday for example; if you had to pay an unexpected bill and needed some extra money in a hurry. You can usually get the money the same day of applying and your salary is used as security, which means a credit check is not generally needed.
Doorstep Loan
As the term indicates, these lenders usually 'sell' loans by using a door-to-door technique. Cash can be given on the spot and repayment terms are agreed at the time, usually by weekly repayments. However these types of loans are generally considered a last resort due to the very high interest rate that is calculated on the money owed.
Mortgages
A mortgage is a long term loan which enables someone to buy a property, generally a house or flat. You pay interest on the amount borrowed over the course of several years. The repayment term can vary between 5-30 years. Different mortgages are available too; interest-only, repayment, fixed rate and variable rates are just some of the ones you can choose from.
Remortgage
Lets you take advantage of any rise in the value of your home and allows you to borrow the difference between what you owe on your mortgage, to the new value of the house. For example if you have a mortgage for £50,000 and your house is worth £100,000 you can borrow an extra £50,000 for whatever purpose, such as home improvements. You will still pay interest on this additional loan.
Business Loan
A loan used to help start-up, improve or help a business to grow.
Student Loan
Offered to students who are in full-time education at college or university. They usually have a lower interest rate than other loans. Some are only paid back once a new graduate starts earning a salary over a certain amount.
Car Loans
A personal loan which is taken out primarily to purchase a car.
Debt Consolidation Loans
A loan which consolidates your debts and pays off what you owe on credit and store cards so you only have one monthly payment, paid back over a longer term, usually a minimum of 5 years.
Debt Management
There are several ways of managing your debt if you are struggling with repayments such as a Debt Management Plan or an IVA (Individual Voluntary Arrangement). They are both designed to help you repay your debts in a more manageable and affordable way.
There are also loans available for those with bad credit who may have defaulted on a loan in the past or missed repayments, the unemployed or those with CCJ's (County Court Judgements).