Choosing the right type of loan

If you need a loan, choosing the right one can make borrowing cheaper, make it easier to manage and lower the risk

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Why do you need a loan?

The reason you need a loan and how you intend to use it typically determines the type of loan you should consider.

Some reasons you might need to get a loan include:

  • Purchasing a car

  • Buying a home

  • Debt consolidation

  • Making a large purchase

  • Financing a holiday

  • Making home improvements

  • Starting a business

Different types of loans

Loans come in two main types:

  • Unsecured loans

    For these loans you don’t have to secure the loan against an asset such as your home. With an unsecured loan, you borrow a lump sum and pay it back in fixed instalments over a set period.

  • Secured loans

    Unlike unsecured loans, a secured loan is secured against an asset. This means, if you are unable to repay, your loan provider can repossess the asset and sell it to recover the loan amount.

If you have a choice between an unsecured loan and a secured loan, you should consider going with an unsecured loan. This is because this loan type won’t put your belongings directly at risk should something go wrong.

You should only choose a secured loan if it is much cheaper or your only option.

Unsecured loans

Unsecured loans tend to be for lesser amounts than secured, however, there are far fewer restrictions on what the loan can be used for. Examples of unsecured loans are:

  • Personal loans are a form of instalment loan that can help you make a big purchase or consolidate high-interest debts

  • Peer-to-peer or social loans are a new area of lending that matches those who need to borrow money with people who will lend it

  • Guarantor loans are a type of loan that requires a co-signature from a guarantor. In the event you are unable to repay, the guarantor becomes liable for the repayments

  • Bad credit loans allow those with bad credit to borrow money. However, interest rates are likely to be higher than other forms of lending

  • Debt consolidation loans allow you to merge existing debts, reducing the number of monthly payments and potentially reducing the overall level of interest you pay. Not all debt consolidation loans are unsecured

  • Business loans are a type of borrowing designed for commercial organisations, not individuals

Secured loans

While secured loans do typically allow you to borrow more money than an unsecured loan, they also tend to come with more restrictions on what they can be used for. Examples of secured loans include:

  • Homeowner loans are secured against your property, so you have to be a homeowner (with equity) to qualify for one

  • Logbook loans are secured against your vehicle, meaning until you have repaid the loan the lender owns your vehicle

  • Bridging loans are used to bridge the gap between when you need to pay for something and when the funds to become available for something else, such as the sale of your home. Typically, they’d be secured against a high-value asset

  • Vehicle finance allows you to spread the cost of a car purchase. After paying a deposit the remaining balance is paid by the finance company and you repay instalments each month. Until the finance is repaid in full, the finance company owns the vehicle

  • Debt consolidation loans can also also be secured loans. They still allow you to consolidate existing debts except a secured debt consolidation loan is secured against an asset

How much can you borrow?

The majority of unsecured loans allow you to borrow between £1,000 and £25,000.

If you require a loan for a larger amount, you might want to consider a secured loan instead where the limits tend to be much higher.

Unsecured loans

Loan type

Borrowing amount

Personal

£500 - £25,000*

Peer-to-peer

£1,000 - £35,000

Guarantor

£1,000 - £10,000*

Bad credit

£1,000 - £25,000*

Debt consolidation

£1,000 - £25,000*

*Speak to an advisor if you need to borrow more, very occasionally you may be able to borrow up to £50,000

Secured loans

Loan type

Borrowing amount

Homeowner

£1,000 - £2.5 million

Bridging

£5,000 - £2.5 million

Debt consolidation

£10,000 - £2.5 million

Vehicle finance

Price of vehicle

How long do you have to repay a loan?

Typically, unsecured loans have repayment terms between one to seven years, however, some loan types do offer shorter or longer repayment terms.

If you require a longer loan term: some secured loans offer terms up to 10 years.

If you plan to repay your loan quicker, some peer to peer loans last just twelve months and many have no early repayment charges. If, however, you need to borrow a larger amount, bridging loans are designed for short term borrowing.

Unsecured loans

Loan type

Borrowing term

Personal

1 - 7 years

Peer-to-peer

1 - 5 years

Guarantor

1 - 5 years

Bad credit

1 - 5 years

Debt consolidation

1 - 10 years

Secured loans

Loan type

Borrowing term

Homeowner

3 - 25 years

Bridging

Short-term, no defined period

Debt consolidation

3 - 35 years

Vehicle finance

1 - 5 years

Consider your credit record

When looking for and deciding on a loan, you need to consider your credit record as well as the amount you need to borrow and for how long.

If you do have a poor credit history, you’ll likely find that your loan options are more limited. There are, however, some loan types that are specifically tailored for poor credit. These include:

  • Guarantor loans

  • Bad credit loans

Your loan application is more likely to be considered by lenders who offer these types of loans, but they are likely to be more expensive than other types of loans.

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Tags: Loans