/ Loans

A guide to the types of loans available

There are different kind of loans out there. Here are a few and how they differentiate between each other.

Guarantor loans:

Guarantor loans are loans where there is a guarantor acting as a backup for the loan. Usually, this is with an asset and in any case you default on the loan your lender will seek to reclaim its losses from your guarantor and may even repossess their asset. This option will usually be for people with very low credit scores and the interest rates on the loan will be very high.

Payday loans:

Payday loans are short term loans with very high interest rates. They have come under intense scrutiny in recent times and most of the lenders have gone out of business due to predatory practices. Payday loans are usually meant to be repaid in 28 days and rather than advertise an interest rate they usually advertise the fee charged e.g a loan of £300 for £100 fee. Payday loans can leave a bad stigma on your credit file and if you miss a repayment they can greatly damage your credit file.

Personal loans:

Personal loans also known as unsecured loans are loans which are not secured against any asset. They are given based on the borrowers affordability. If you have a credit score which is low then you are very likely to receive a high interest rate and vice versa. Personal loans can be used for different purposes and sometimes they are simply labelled based on their use case e.g “car loan”. Missing a payment on a personal loan will seriously hamper your credit score and reduce your chances of getting credit in the future.

Secured loans:

These are loans which are secured on assets, this can be cars, houses watches etc. There are different types of secured loans for different use cases. In the case of a car there are personal contract purchases and Hire purchase loans and in the case of a house there are home improvement loans and mortgages.

Secured loans are given mostly based on the value of the asset and then the creditworthiness of the borrower. To get access t secured loans you will usually need to have enough money to buy a minimum equity in the asset you want to purchase e.g when purchasing a house with a mortgage. Secured loans are usually for larger value items and payment periods can go up to 35 years. Missing a payment on a secured loan can seriously hamper your credit file and will almost likely lead to the repossession of your asset.

Due to the fact that secured loans are asset backed they are usually cheaper than personal unsecured loans.

Debt consolidation loans:

These are loans used to bring all your debts under one loan with a lower cost. Debt consolidation loans can be secured or unsecured. You should ensure your debt consolidation loan actually provides savings rather than just giving you one monthly payment and bringing all your debt into one loan.

Subprime or bad credit loans:

These are loans for people with very little credit scores and low affordability. These loans are offered by specialist lenders with conditions in some cases e.g car finance lenders requiring the cars be fit with a telematics device to ensure the driver only has access to it when they pay their loan. The interest rates on this loans are incredibly high and having these loans show on your credit file can reduce your creditworthiness to other lenders.

When setting up a loan you should consider the Apr on offer; this is are the typical or representative rates offered half of applicants at least. You should also consider the costs with taking up the loan such as application fees. Ensure you can afford and keep up the monthly repayments and that the term on the loan isn't costing you more by being too long and therefore charging you for the same amount of debt over a longer period.

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A guide to the types of loans available
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