Different types of loan

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4 September, 2020

A loan is an amount of money borrowed to an individual from a bank or financial institution  that is paid back over a set period of time with a fixed interest rate added on. Loans are typically either secured or unsecured.

There are many different types of loans offered on the financial market. Here I have outlined some of the main types of loans to help you get an understanding of which loan would best suit your individual circumstance. 

What is a secured loan?

A secured loan is sometimes referred to as a homeowner loan. It is where your debt (money borrowed) is tied to an asset e.g. your house or car. This means that the creditor can take possession of that asset to cover your debt if you default or do not repay your loan. As the creditor isn’t taking as much of a risk by borrowing you the money, they tend to come with lower interest rates.

Advantages of a secured loan

• The interest rates are lower than usual as they are lower risk for the lender
• You can borrow a larger amount of money than with an unsecured loan.

Disadvantages of a secured loan

• Your property is at risk if you do not make the payments
• They can only be used to make specific purchases

What is an unsecured loan?

An unsecured loan allows you to borrow money that isn’t tied to any of your assets. Due to the risk being higher without the security of the loan being linked with a personal asset, interest rates are higher than a secured loan. Instead of the loan being tied to a personal asset, borrowers are offered loans based on their credit history and income. 

Advantages of an unsecured loan

• Unsecured loans are less risky from a borrowers position as you aren’t in danger of losing your assets if you don’t keep up with your payments
• You don’t have to be a homeowner to be approved 
• You have more flexibility in terms of the pay back term and can usually negotiate this with the lender

Disadvantages of an unsecured loan

• The interest rates are higher than secured loans
• Unsecured loans are harder to get accepted for if you have bad credit 

What is a Guarantor Loan?

A guarantor loan is similar to a personal loan however, your guarantor promises to repay your loan if you are unable to or stop making the payment. The guarantor can be anyone (usually a close friend or relative) given that they meet the lenders criteria. Guarantors must have good credit, be over 21 and a homeowner. 

Advantages of a Guarantor Loan

• A guarantor loan is an option for someone who has bad credit 
• It helps people with bad credit to build their credit score 
• With using this to build your credit, this will help with future applications and make you eligible for lower interest rates. 

Disadvantages of a Guarantor Loan

• Interest rates are higher than secured loans
• You’re not at risk but the person who has agreed to be your guarantor is

What is a Debt Consolidation Loan?

A debt consolidation loan is a process where one loan is taken out to repay multiple other loans. Multiple debts are combined into one debt with lower overall interest paid and/or lower monthly payments. 

Advantages of Debt Consolidation

• Lower monthly payments as all of your debts are transferred into one
• You pay lower monthly interest than you would on several separate payments

Disadvantages of Debt Consolidation

• You could be paying more interest in total, you pay less interest on a monthly basis but over a longer period of time
• A lot of debt consolidation loans need to be secured loans

What is a short term loan?

A short term loan is pretty self explanatory. They are beneficial for people that need a smaller amount of money for a shorter amount of time (anything from a month upto a year). They are usually used for emergencies or temporary situations.

Advantages of short terms loans

• They are quick access to money incase of emergency 
• Most people will be accepted even if you have bad credit
• No long term commitments 

Disadvantages of short term loans

• They come with higher interest rates
• They usually have higher fees for missed payments

In summary, there are lots of different kinds of loans available to you on the market, some with lower interest but higher risk to you and some with high interest but lower risk to you. The type of loan that you get accepted for will depend on your credit history and your income. The better your credit score and history, the better chances you have of being accepted for the best loans.

Check your loan eligibility today by clicking here.

Editorial Disclaimer: This article was updated 18.10.2021

Opinions expressed here are the author's alone, and not those of any bank, credit card issuer or any other company. This article has not been reviewed, approved or otherwise endorsed by any of these organisations. NB: The information on this page does not constitute financial advice, please do your own research to ensure that the product / service is right for your individual circumstances