A loan is a borrowed sum of money, repayable with interest, either in a lump sum or over time. Understanding your loan choices is crucial for informed decision-making.
A loan is a huge amount of money borrowed from the lender in an expectation to repay it back either all at a time or over a period of time with interest. Knowing your loan options will help you make informed decisions about the type of loan you need to meet your goals.
There are 2 main types of loans in the UK loan market; secured loans and unsecured loans.
Secured types of loans are supported by something that is of high value that you own, called collateral.
Some examples of collateral security include any valuables like jewellery, house, vehicle etc. If you have got an approval for these loans, the bank will have the deed or title of the collateral until the loan is repaid in full.
Being not in a position to repay your loan, the bank may take charge of the collateral, sell it, use the proceeds from the sale to settle your remaining loan.
The limits for borrowing finances are usually high for secured loans due to collateral security. Secured loans are of various types like mortgage loan, bridging loan, homeowners loan, logbook loans, and some types of debt consolidation loans. In the following sections, we shall discuss the various types of secured loans in detail.
A mortgage loan is one in which the real estate or property is used as collateral. The lender(usually the bank) and the borrowers enter into an agreement, wherein the borrower gets a cash upfront from the lender and agrees to pay it over a particular span of time. Often home loans are referred to as mortgage loans. Mortgage loans are usually taken by home buyers to purchase a home when they don't have enough cash in hand. These loans are also used to borrow money from lenders for other purposes using the house as their collateral security.
A second charge mortgage or a second charge loan allows you to borrow money against your existing property. They are quite similar to mortgage loans but are for people having an existing outstanding mortgage.
Your second charge loan always stays under your regular mortgage and the term of repayment could be anywhere between 3 to 25 years.
These are short-term funding options used to bridge a gap between the main line of credit becoming available and a debt coming true. In simple words, Bridging loans is an additional home loan taken on top of your existing home loan until the property is sold and the loan is closed. This simply means you have 2 loans and you pay interest for both loans during the bridging period. It is usually an interest-only payment home loan with limited term period. The interest rates for this kind of loans are usually higher than the normal rates.
Upon selling your current property, the bridging loan is converted into a home loan for the newly bought house.
This type of loans helps you to borrow money using your property. This is also called a home-equity loan, where the value of your property will be taken into consideration when applying to borrow money. Some key features of this loan include the following.
Logbook loans are loans against your vehicle. Although you can use your vehicle as long as you pay the loan, the lender owns your vehicle until the debt is paid back in full. Logbook loans are risky and expensive, and you can borrow money depending on how worthy is your car.
When taking a logbook loan, you need to hand over the car documents like vehicle registration document or vehicle's logbook to the lender. These documents will stay with the lender until the loan is repaid in full.
If you have lots of different debts and struggling to keep up with the loan repayments, then secured debt consolidation loan works best for you. Here, you merge all your loans into one single debt in order to minimise your monthly payments.
You are borrowing money against collateral to pay off all your present loans and owe money to only one single lender.
The unsecured loan is the money borrowed without any collateral. Due to the absence of collateral, the lender faces a high level of risk. Due to this reason, the borrowing limit will be usually low with high-interest rates.
Personal loans are unsecured loans where you can take loans from lenders to meet any of your personal financial requirements. These loans are provided on the basis of certain criteria's like level of income, employment history, credit history, repayment capacity etc.
Unlike secured loans, personal loans are not secured against any asset or collateral. Since the borrower has not put any collateral like property or gold to avail the loan, the lender cannot auction anything that you own, in case of a default. In addition, due to the greater perceived risk of personal loan, the interest rates are always on the higher side compared to secured loans.
Personal loans can be availed for any financial needs like home renovation, education requirements, marriage related expenses, purchasing electronic gadgets or home appliances, meeting unexpected medical expenses, a family vacation, or any other emergency situation. Since these loans are taken for personal financial requirements, the bank will not monitor how the money was spent by the borrower. Tenure of personal loan ranges between 1 to 5 years and often only agreed on a case to case basis.
If you have bad credit but need money urgently consider applying for a guarantor loan. A guarantor loan is an unsecured loan, where a guarantor (second person) is responsible for paying the debt in case the person availing the loan fails to repay or misses their repayments. This type of unsecured loans are a great option for those people having a poor credit history and struggle to get accepted for a loan product. To get this loan, all you need is a guarantor to affirm for your potential to make the repayments.
Debt consolidation unsecured loans are used to simplify existing and to pay off existing debts by consolidating multiple accounts and payments into one account with one lender and payment.
Typically, debt consolidation unsecured loans can be used for unsecured debts. Money borrowed through debt consolidation unsecured loans can be used to repay debts from credit cards, payday loans, personal loans, and medical bills.
The interest rate for the debt consolidation loan depends on your creditworthiness. If your credit history is good, then you may get this loan at a lower interest rate than what you are paying for your present loan. This enables you to save money on monthly interests as well as monthly repayments. Yet another option to get the loan at a lower interest rate is to extend the duration of the loan term. However, longer loan term means you pay more interest in total.
Payday loans are short term loans usually involving high-interest rates. They are mainly designed to cover short financial requirements. Borrowers pay the money back to the lender when they are next paid by their employer or otherwise repay it over a period of 2 to 12 months. Payday loans usually amount between 100 to 1000 pounds and are not secured through any collaterals.
Various banks issue credit cards to their customers with a maximum credit limit. With these cards, you can buy as little or as much of your limit as you like. Credit cards are mostly used for general spending, accepted by most companies and retailers.
Another type of loan is a bank overdraft. You may get an arranged overdraft agreed by your bank previously, and the charges are usually low.
However, unarranged overdrafts are not agreed upon by the lender previously. These happen when you spend above your overdraft limit or don't have arranged overdraft facility. Unarranged overdraft comes with huge charges.
Choosing the right type of loan is very important. The type of loan you take must fit your situation so you can manage it better at very low risk. Based on the above discussion, you would have got a clear picture of the UK's loan market. This guide can help you know the various types of loans so that you can take an informed decision that will best meet your needs.