When you get a loan, you borrow a specific amount of money and agree to pay it back over a pre-defined schedule. Loans are easy to budget for because the repayments are predictable, unlike credit cards, although their interest rates could be higher when borrowing small amounts. There are several different types of loans (such as secured loans and loans for people with bad credit) that each come with their own benefits and risks. However, you choose the right type of loans, then it could make it easier for you to manage your personal finances. During this short (but insightful) article, we will help you understand the main types of loans that are available to people in the UK and provide you with more information about them.
Personal Loans (Unsecured Loans)
Personal loans come in all sorts of forms. They are also known as secured loans because applicants don’t need to use anything as security to secure them. The offer on a personal loan is based on the information on your credit report together with some personal details such as your income (which isn’t included on your credit report). Personal loans can be labelled for certain purposes. For example, a car loan is a personal loan because it’s being used to buy a car. But, the name of it is just a way for lenders to market their products.
A secured loan is where you borrow money that is secured against an asset that you own. If you don’t make the repayments on this type of loan, then your lender has the right to take the asset that you originally put up as security. The majority of secured loans are normally secured on a property which is why they are sometimes referred to as homeowner loans or second mortgages. However, there needs to be sufficient equity in a property in order to take out a secured loan. This is the difference between your outstanding mortgage and how much your home is worth.
Payday loans are short-term loans that are designed to be paid back on your next payday. Instead of lenders advertising an interest rate, they usually charge a fee instead. For example, you might pay £50 for borrowing £200 over a month so you will repay a total of £250. However, if you miss a payment, you will be charged more money which means that these types of loans can work out very expensive. Payday loans have received a lot of mad media coverage over the past few years since it was found that Wonga wrongly sold thousands of unaffordable loans to vulnerable people.
Bad Credit Loans
If you suffer from a bad credit score or don’t have any credit history, then you are going to struggle getting a loan. But, it doesn’t mean it’s impossible. You could be eligible for a bad credit loan. However, you will pay more interest and might be asked to offer security for the loan. This is because lenders will deem you as high risk and will want to know they have an asset they can take if you fail to make the repayments.
You might also be able to get a guarantor loan if you have a low credit score. This means that you will need to ask someone to be your guarantor who will be responsible for paying back the loan, should you fail to do so yourself. Your guarantor needs to have a good credit history and usually a homeowner.
Debt Consolidation Loans
Debt consolidation loans are designed to help people who are struggling to pay off a number of debts by moving it all into one place. The biggest benefit of a debt consolidation loan is that you will have one monthly repayment to make rather than several. Depending on the interest rate you get, it could also mean that you pay back less each month.