There are so many types of loan, it’s sometimes a tricky business choosing which one you really need. Hopefully this guide to the most common type of loan will help you decide.
Unsecured loans
Also called personal loans, this type of loan is perhaps the most common one used for things like weddings, home improvements, even holidays. The typical loan term is between 1 and 5 years.
Good if:
- You need to borrow between £1000 and £25,000
- You have a good credit rating
- You are a tenant
- You have enough disposable income to cover the repayments
Not recommended if:
- You have problems with repayments in the past
- You have a temporary job or inconsistent income
Secured loans
Also called homeowner loans because they are only offered to people who have a mortgage, these are similar to mortgages as they can run for up to 25 years. Can be used for high-price purchases such as house extensions or major home improvements. These loans will be secured against your house, which you could lose if you default on payments.
Good if:
- You need to borrow more than £25,000
- You have a mortgage
- You can afford the repayments
- Your credit rating is average
Not recommended if:
- You don’t need a large amount – never borrow more than you need just because you can
- You have a poor credit history
- You aren’t in permanent employment
Also known as instant loans, cash advance loans or short-term loans, these have a bad press due to the extremely high APR (usually in excess of 1000%). But it’s worth remembering that it’s only the equivalent rate (what you’d pay if you took the loan out for a year); in actual fact you’re only making one lump interest payment so it’s not as bad as it seems.
Good if:
- You need between £50 and £1000 in a hurry
- You have a direct debit due out and want to avoid bank charges
- You need to cover car repairs, insurance deposit etc
- You have no credit history or a very poor one
- You earn at least £800 per month
- You only need to borrow for up to a month
Not recommended if:
- You can’t afford to pay it all back, plus interest, in one payment
- You don’t have a UK bank account with direct debit facility
Other loans
- Car finance loans – Combines elements of both personal and secured loans. The loan is secured against the car you buy, which can be repossessed if you default, but you do not have to be a homeowner or have a great credit score to qualify. The APR will be higher if you have a poor credit score.
- Debt consolidation loans – If you’re in debt over £15,000 then a consolidation loan might help you. They will combine all your separate loan repayments into one single manageable payment. You should contact all your creditors for settlement figures and/or renegotiate repayments before taking out this type of loan. Again, the APR will probably be very high.
No matter what type of loan you need, it’s important to stick to repayments. Your credit score will be affected if the loan provider issues a missing payment mark or a default, and your home may be at risk if you miss payments on a secured loan.
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