During these turbulent financial times, many people are finding their purses stretched to the limit and may turn to taking out a loan to see them through until the air clears, or to fund that special project. Loans are made up of the base borrowed amount plus the interest; the amount you pay to the lender to be allowed to borrow the money, and are repaid in set monthly instalments over a pre-determined period of time. The longer it takes to repay a loan, the more interest is accrued. Interest rates are generally set by the lender’s typical APR (Annual Percentage Rating), but it is not guaranteed that you will be given this typical rate – credit history, the amount borrowed, and the length of the loan term are all taken into account. With that in mind, here’s a guide to the types of loans available to choose from…
Bad Credit loans:- The name says it all – this is a loan tailored for those with a poor credit rating, CCJ or a blacklisting. These loans typically have higher interest rates but can be helpful in ultimately improving your credit rating (see Improving Credit History).
Bridging loans:- This is a loan for those moving home, and comes in two forms. A closed Bridging loan is for those who have sold their old house and secured purchase of the new, but need money to complete the payment. An open loan is for those who have bought a new home before selling the old. The latter is much less favoured by banks because it creates more of a risk for them.
Car loans:- This is, obviously, a loan created solely for purchasing a car. This loan is normally executed as a ‘Hire Purchase Agreement’, which means that the buyer essentially hires the car from the lender until the repayments are completed. The loan is normally secured against the car, so if payments are not met, the car can be repossessed.
Debt Consolidation loans:- You’ve all seen the adverts for these on television – this is a loan that rounds up all a borrower’s outstanding loans and corrals them into a single monthly payment, usually with a lower interest rate. This is very useful if debts are becoming hard to handle.
Home loan:- Also known as a mortgage. This is a loan taken in order to buy property, and is secured against the house.
Home Equity loans:- Sometimes known as a second mortgage, this is secured against the equity of your home (the market value of it versus the amount left to pay on the mortgage) to offer a low interest loan for any purpose. Lenders normally require the borrower to have started to repay the mortgage in order to increase the equity.
Home Improvement loans:- Used for making renovations, this is normally secured against the house but can also be taken independently from the mortgage.
Homeowner loans:- This is a secured loan that specifically uses the house or equity as collateral. Because of this, the interest rates are usually lower.
Pay Day loans:- This is a short-term loan which is essentially an advance on your monthly paycheque should you find yourself a little strapped for cash. It is paid back once your wage is received.
Personal loans:- These are unsecured loans given for any personal purpose. They are normally relatively small payments, and the loan length is fairly short (generally 1-10 years), but personal circumstances are taken into account in deciding these factors.
Secured loans:- This is a loan that uses any valuable asset as collateral on the payments. This means that interest rates are typically lower.
Unsecured loans:- These do not require any collateral, so are less flexible and usually have higher interest rates than Secured loans. They are suitable for those with good credit history who require a small personal loan.
Payment Protection Insurance:- This insurance can be taken out on a loan to cover your repayments, should your income be affected by unemployment or illness. It is not a necessity, and some argue that it is actually detrimental to one’s finances as policies can cost exorbitant amounts. However, as with all insurance, the cost of the policy usually redeems itself when and if an incident occurs that requires it to be enforced. It may be worth considering for longer length loans, if only to provide peace of mind.