There are lots of different types of loan on the market, and it can get confusing to know where to turn when you need to borrow money. Here are five types of loans and when to use them.
Mortgage A mortgage is a loan secured against a property. Most people who wish to buy their own home do not have enough money to buy it outright and will borrow money to buy it. The money is secured against the property and if you can’t keep up with the repayments on your mortgage, you could lose your home.
A mortgage can be a large loan, so this is the best type of loan to take out for buying property. The minimum loan is £25,000 and the maximum will depend on your earnings and other credit commitments.
You can usually shop around for a new deal after 2-5 years and refinancing your home is called a remortgage. People often take this refinancing opportunity to borrow more money to make home improvements such as an extension or a new kitchen. These tend to be costly, but they could increase the value of your home.
Secured Loan A secured loan is like a mortgage in that it is secured against your property and your home could be repossessed if you don’t keep up with the repayments. However, a secured loan is taken out in addition to your mortgage.
Secured loans are useful if you want to borrow money for large purchases such as home improvements or a new car but you don’t want to add the loan to your mortgage. It may be that you want a different term for your mortgage and secured loan or there may be penalties to refinancing your mortgage at a particular time. You are only eligible to use this type of loan if you own your own property.
Unsecured Loan An unsecured loan is not secured against your property, so your home is not at risk if you don’t keep up the repayments. You could still be taken to court for non-payment though which could affect your credit rating. The interest rate tends to be higher for an unsecured rather than a secured loan as the lender can’t take your home in exchange for your outstanding debt.
Unsecured loans are usually taken out for loans between £1,000 and £25,000. They have fixed monthly payments and a defined repayment period. They are great for buying a new car, home appliance, or borrowing money to pay for your studies, such as a student loan.
Payday Loan A payday loan is a type of unsecured loan that is taken out so that you can make a purchase when you want to rather than having to wait until your next pay day. It is worth shopping around for the best deal on Pay Day Loans with a company such as Payday UK, who will search for the best deals available on the market and compare things such as APR and amount you can borrow.
If you have splurged at the beginning of the month and you need some more money to tide you over until you get paid again, this is an ideal way to borrow. It is also great if you see a bargain and don’t want to have to wait until pay day to get it. However, interest rates can be very high, especially if you don’t pay the loan back in full at the end of the month. If you are not sure when you might be able to repay the loan, you may be better off looking for an alternative loan.
Credit Card This is a credit facility rather than a loan. However, you can use it in a similar way. The lender will agree to a set amount of money they will let you spend, and you can fix a regular repayment amount if you want to. You are expected to make a minimum repayment every month, but you can pay any amount that is larger than this.
This is a fantastic way of flexible borrowing, and it is handy for large purchases as it is covered by the Consumer Credit Act, meaning that if the goods you buy are not fit for purpose you can claim a refund through the credit card company.
Credit cards are a great way of short-term borrowing or making sure you have extra protection when you buy large items. However, keeping a balance on a credit card can be costly so you may want to consider other options if you are not going to be able to pay off the balance in full every month.
These are the five main types of loan that might be available to you.
Hopefully, this guide has helped you to understand them a little better and given you the best idea of which one to apply for.
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