Different types of loans simplified
Loans can play a huge role in our financial lives, but unfortunately few of us receive any formal education on the difference between loans. This means that choosing the best type of loan for you isn’t always a walk in the park.
For those of you who remain undecided on the matter, it can really help to be aware of your loan options. We know from experience that it’s only by comparing a wide range of loans that you’ll be able to make an informed decision on the best finance option for you.
Secured Loans
Also known as homeowner loans or second mortgages, secured loans are calculated on the equity of your property, the difference between its appraised value and the outstanding balance of a mortgage. Personal circumstances such as your monthly income will also affect the amount you are able to borrow.
Secured loans tend to be paid over a long period of time (between five and twenty years), and interest rates tend to be lower than unsecured loans. Because these loans are secured against a property or other assets, larger amounts can be available. Most banks and lenders will offer anything from £5,000 to £100,000, though alternative amounts may be available dependant on the specific lenders’ criteria. Secured homeowner loans may be an option for people with a less-than-perfect credit history since the equity in your property may give you a higher chance of qualifying.
However, longer repayments could also mean that you will pay more interest in the long term. The loan applicant must also understand that failure to keep up with repayments may result in their home being repossessed.
Unsecured Loans
Unsecured loans (also known as personal loans) aren’t secured on any assets. The amount you can borrow may extend up to £40,000 with some lenders, and generally, the maximum repayment period is ten years.
The rate you will pay will usually depend on your credit score. If you have struggled with debts in the past and have a poor credit history, you could be turned down for a personal loan or charged a higher rate of interest.
Be aware that interest rates are generally higher than with a secured loan because the amount is not tied to any major assets, such as a property. Advertised rates may not actually apply to your application. Whilst an advertised rate must be given to 51% of successful applicants, this means that almost half will pay a different, possibly higher rate. While the lender will usually have no claim over the borrower’s home, they may be able to seize other goods or freeze accounts in the event of non-repayment, as well as the risk of applying a CCJ (county court judgment) to the property.
Credit Cards
Unlike secured and unsecured loans where you borrow and repay a set amount of money, credit cards are a form of revolving credit. Each month you can borrow up to a pre-set limit, which is determined by a range of factors including your credit rating and income.
Applying for a credit card can be fast and straightforward. It’s usually possible to find out whether you qualify online in a couple of minutes.
You’ll also find that many credits cards offer useful rewards. There’s a huge variety out there, from cash-back cards which offer benefits such as air miles to 0% balance transfer cards which allow you to transfer your balance (and avoid interest charges – although a fee is generally charged for this service).
Credit cards can also be a safer way of spending. Purchases which cost between £100 and £30,000 are protected under the Consumer Credit Act. If you buy faulty goods or services, your credit card provider can refund you.
If you don’t pay off the full balance of your spending each month, you can incur high-interest charges. You should set up a direct debit which will at the very least pay the minimum repayment. You should also watch out for high-interest charges when withdrawing cash. Make sure to read the terms and conditions thoroughly when you apply for a card.
Credit cards can have a sizeable impact on your credit score. Paying them off consistently is a great way of persuading lenders that you can manage a bigger loan such as a mortgage; on the other hand, missing payments can impact your credit rating.
Payday Loans
Many of us have been in a situation where unexpected events (house repairs, an expensive bill) have left us temporarily short of cash. Payday loans offer a fast, short-term solution to those in financial difficulty in the form of a loan that is generally repaid on the borrower’s next payday, with added interest.
However, it’s worth bearing in mind that interest rates on these loans are typically far higher than other unsecured loans. You should be aware that taking out a payday loan and failing to make repayments on time is likely to affect your overall credit rating.
While this guide allows you to compare the major differences between loans, another comparison tool is the Annual Percentage Rate, which tells you how much a financial product will cost you over the term.
Read our information on how APR is calculated, and remember that the APR you are being charged by your lender could be considerably different than that advertised.
For a typical loan of £30,000.00 over 120 months with a variable interest rate of 19.56% per annum, your monthly repayments would be £598.34.
Including a Product Fee of £2,400.00 (8% of the loan amount) and a Lending Fee of £807.00, the total amount repayable is £71,800.20.
Annual Interest Rates ranging from 11.88% to 29.38% (variable). Maximum 50.00% APRC. The loan must be paid back by your 70th birthday. Read more.
Think carefully before securing debts against your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured against it. If you are thinking of consolidating existing borrowing, you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
