An increasingly larger number of lenders are starting to offer new types of loans, competing for the best terms and conditions. While this is great in terms of variety, the large number of types of loans can make it difficult for individuals to understand which product or service suits them best. Furthermore, most lenders do not spend nearly enough time explaining what the differences between the various types of loans are, which can lead some to bad deals.
This having been said, understanding what loans you can choose from isn’t too difficult. Furthermore, once you know what each type implies, you will be able to make better use of them, provided that you have a good credit rating. Please keep in mind that we will not focus on actual loans, but on categories. In other words, each of the loan types below will have different terms and conditions.
- Secured Loans
Secured loans are usually the largest ones that individuals are able to access. This is due to the fact that in order to obtain a secured loan, you will have to offer your property as collateral. The property can be your car, your home, or a very valuable item that the lender can see the value of. This collateral serves as a guarantee for the lender. If you are unable to repay the loan on time, the lender will be able to legally take possession of the collateral and sell it in order to get the money back.
These have to be repaid on a monthly basis and can have fixed or variable interest rates.
- Unsecured Loans
Unsecured loans are less risky. However, they have greater limitations in terms of value. Most lenders have low eligibility standards when it comes to these simply because the amount of money that you can borrow is much lower than in the case of secured loans. The most commonly used unsecured loans are:
- Personal loans;
- Payday loans;
- Student loans;
Generally speaking, unsecured loans are great if you need to pay for emergency medical procedures, home renovation projects or if you want to purchase expensive electronics and household appliances.
As in the case of secured loans, these too have to be repaid in monthly instalments and can have fixed or variable interest rates.
- Credit Union Loans
Credit union loans are less popular than others, mainly as a result of the fact that they are limited to close communities. Credit unions are organisations in which members combine their savings in order to give each other loans. The main limitation of these is the fact that you need to live or work in the same area as other members in order to borrow money from the organisation.
- P2p Loans
P2P loans are online loans that can be accessed through specialised platforms. These websites bring borrowers and lenders together and set interest rates for both parties. They are not regulated by the FSCS. However, they do come with great advantages for borrowers.
Most platforms do not perform credit rating checks before giving individuals P2P loans. They also rarely report them to credit registers, making the loans great for those who have low credit ratings. The disadvantage with these is the fact that they have higher interest rates than ones offered by banks.
Each of these types of loans will cater to the needs of different individuals. Make sure that you know what you’re getting yourself into when you borrow money. Some loans come with risks that are more serious than others. While not repaying a secured loan on time will only lead to a lower credit rating, failing to repay a secured one can make you lose your home.