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Types of Loans: Which One is Best for Me?

Last updated: 24 May 2021

Types of Loans: Which One is Best for Me?
Choosing the right loan to suit your needs could be the difference between great financial planning or a gateway to debt. Let’s take a look at some of the most popular types of loans. 

Personal loans

Also known as unsecured loans, these are one of the most common types of loans. They’re so called because they’re based on personal information such as your income and credit score, rather than being secured against an asset.

Typically, you can borrow between £1,000 and £25,000 for between 1 and 7 years. You’ll find interest rates for personal loans vary considerably across lenders, so be sure to compare personal loans through our tool to get a good rate. 

Secured loans

By contrast, secured loans are ones which are secured against a high-value asset, usually a house or car. You can borrow considerable sums of £25,000+ for, in some cases, as long as 35 years.

Because secured loans involve vast amounts of money, you need to put up an asset as collateral in the event you can’t pay – so they’re not something to be taken out lightly! However, because they’re of a much lower risk to the lender, you’ll generally enjoy much lower interest rates. Start comparing secured loans today with usave.

Guarantor loans

If you can’t get approved for a loan, then you can elect a close friend or relative – one with a strong credit score – to act as a guarantor on the loan. That means that, in the event you miss a repayment, your guarantor will be obliged to foot the bill. However, if you meet all your repayments then your credit score will improve and, in the future, you may be able to borrow without a guarantor.

Generally, you’ll be able to borrow between £1,000 and £10,000, with loan terms between 1 and 5 years. And again, because of the associated risk, interest rates tend to be pretty steep.

Bad Credit loans

As most loans are contingent on credit scores, you may find you’re not approved if yours is, shall we say, less than favourable. The same goes if you don’t have a credit score.

Bad credit loans, also known as subprime loans, are specifically for those with bad credit histories. You won’t necessarily get great rates of interest, as you’ll be considered high-risk, but you could get approved where you’ve otherwise been refused. You can compare bad credit loans here.

Payday loans

Payday loans have a bad reputation, and for good reason. They’re short-term: one month or less, to be exact, marketed to tide you over until your next payday. And because of this, they come with exorbitant rates of interest so that the lender can make as much money as possible – in fact, some loan companies have been taken to court over this.

You could end up owing several times what you borrowed, even more if you miss a payment. As such, you should avoid payday loans as best you can and look to other ways of borrowing instead, such as a credit card.

Debt Consolidation loan

If you have multiple debts you’re struggling to keep on top of, then consider a debt consolidation loan. The risk of having several debts is that you’ll incur penalty fees on each missed payment, as well as paying varying rates of interest across the board.

Amalgamating all your debts into one monthly payment can help you know exactly what you owe and keep things in check. Depending on what deal you get, you could even find you get a more competitive rate of interest too, though do watch out for the loan term to see whether it’ll save you money overall.

Home Improvement loans

Depending on how radical the changes you envision are, you could take out an unsecured loan of up to £25,000 to make home improvements.

If you need more than this (perhaps you’ve got some rather drastic modifications in mind), you could secure a loan against your property or another asset. Alternatively, if you own your home outright you could take out a second mortgage.

Car finance

You might be contemplating taking out a loan to cover the cost of a new car. Typically, these loans last between 1 and 5 years and you could borrow as much as £100,000.

You’ll have various options, such as keeping the vehicle after the payment term ends or trading it in for a newer model. With car finance, the loan is secured against the vehicle, meaning you’ll typically get lower rates of interest.

What to consider before you take out a loan

Now you know what types of loans are available, there are a few key things (beyond just the price tag) to look for when you run your loan comparison:

  • The loan amount – don’t borrow more than you need to
  • The rate of interest – advertised rates of interest only have to be offered to 51% of applicants, and it tends to be those with good credit scores that nab them
  • The repayment term – long-term loans may offer lower rates of interest, but you’ll be paying back more overall
  • Additional fees and charges – you could be charged administration costs, penalty fines and early termination fees. Find out what these are before you apply 

 

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Michael Quinn

Author: Michael Quinn

Michael is a dedicated author helping usave to write guides, blogs and news for the last four years. When not writing articles, you can usually find him at wine tasting events or having a political debate on the night tube.

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