Types of Loans

20-01-07 11:50

PERSONAL LOANS

A personal loan is a fixed amount of money, borrowed at a fixed rate and repaid over a fixed amount of time. They are provided by banks, credit unions or online lenders - on the basis of key criteria such as income level, credit and employment history, repayment capacity, etc. They can be used for multiple purposes; maybe you have an unexpected bill or perhaps there is a project you have to work on as soon as possible. 

They are great for anyone with excellent credit. However if you don’t have excellent credit history, then some personal loans might come with an interest rate so high that it’s more than some credit card rates. It’s important you know the interest rate before taking out a personal loan. 

The minimum age limit to apply for a personal loan is 18. The maximum age can go up to 60 years (salaried employees) and 65 (self employed). However, age limits do vary bank to bank. Your income should also be at least £25,000 per annum. 

SHORT TERM LOANS

“Short term” just means that the loan is designed to be repaid quickly or in a short amount of time, most terms normally include repayment plans lasting months. They are made for when life sometimes puts us in tricky positions that involve having finances at hand. 

Applying for a short term loan requires a lender to carry out a credit check on you. Whilst previously this would have decreased someone’ s chance of being accepted if they had a less than perfect credit score, many lenders are now changing how they assess a person’s suitability. 

In terms of monthly repayments, short term loans can be more expensive than longer term ones. This is simply because you are paying the amount owed more quickly.

BUSINESS LOANS

These are similar to personal loans but they’re specifically intended for business purposes, to help manage your cashflow or to expand. The interest rate on the loan is based on a number of different factors, including the health of your business and how much you’re borrowing. There are two options when it comes to these loans; small business loans or merchant cash advance.

Small business loans are for the  short term, which are paid off at a fixed rate. Merchant cash advance is short term cash that you repay as a percentage of your daily card sales. Almost any small business can get a loan, the most common types include: pubs, restaurants, retailers, hotels, garages, beauty salons and more. The criteria that makes you eligible for a business loan is simple; you can apply for one if:

• Your business has been operating for three years or longer

• Your business has an annual turnover of £70,000 or more

If you don’t meet this criteria, a merchant cash advance might be suitable instead. 

Your business can receive the money it needs in as little as two working days. The application processes are straightforward and only usually require documents such as proof of identity and last three months’ bank statements for the business. 

GUARANTOR LOANS 

A guarantor loan is a type of loan which requires a guarantor to co-sign the loan agreement. The guarantor is someone who agrees to repay money if the original borrower is unable to.  These types of loans are a perfectly legitimate way to help someone with a less than perfect credit rating get the finance they need. 

Guarantor loans are most suitable for: 

• Someone with no credit history, e.g. a young person or someone who is new to the country

• They’ve just started a new job 

• They have a low income salary 

Almost anyone can be a guarantor; they are most often parents, spouse (as long as you have separate bank accounts), sibling, friend, or even a grandparent. However, you should only be a guarantor for someone you trust and are able to cover the repayments for. 

Bear in mind, a guarantor must be over 21 years old, with good credit history and financial stability. If you’re a UK homeowner then this will add credibility to the application. Having said that - if you’re not a homeowner, then don’t worry as there are other options. Being able to demonstrate that you have sufficient assets or wealth, will help the decision. 

It is very important to note that once the guarantor has signed the agreement, there is no way to disclaim. No lender will remove you from the agreement because your credit history, employment status and other influences all had an impact on the approval. 

STUDENT LOANS

A student loan is designed to help students pay for post-secondary education and the associated fees, like tuition, books and supplies. Another thing student loans cover is maintenance - this is your living costs, such as your accommodation, travel, food and so on.  You get more if you’re living away from home, as you will be paying rent. If you are living at home while studying, the maximum amount you can get is £7,529, in 2019. The total amount you are entitled to on a student loan depends on where you are living. For example, those in London receive more due to higher costs. It is also dependant on your household income.  It is fairly easy to get approved for a student loan, just have proof that you are enrolled or accepted as a student in an eligible degree or certificate programme. 

College graduates often worry that they will be stuck repaying their student loans for decades, even during retirement. The start date of repayments and amount of time it takes for you to pay back the loan in full depends on the type of loan, the amount borrowed, the interest rate and the repayment plan the borrower selects.

DEBT CONSOLIDATION LOANS

Debt consolidation is where an individual takes out a loan to pay off several different existing debts, e.g. loans, overdrafts or credit cards. Consolidating these different loans into one makes it much simpler as there is only one monthly repayment to make. This helps to keep track of debts and manage their cash flow. 

There are some basic criteria requirements needed when applying for a debt consolidation loan. You must:

• Be aged 21-75

• Have been a UK resident for at least three years 

• Have an annual income of at least £15,000

• Have a UK personal bank account

If your application gets rejected, there could be a number of reasons why. Each decision is based on the applicant’s personal circumstances and by reference to a credit reference agency. Speaking to a debt expert about the different options available to you could be very helpful as they’d be able to advise you on your individual situation. 

LOGBOOK LOANS

A logbook loan is a type of secured loan where your vehicle - such as car, van or motorbike - is put up as collateral against the debt. The lender holds on to your logbook for the duration of the loan, but you get to keep the vehicle and use it as normal. Essentially it allows you to unlock the value in your vehicle without having to sell it, which you can only do once the loan has been paid in full. 

Here is a brief summary of the requirements you’d need to qualify for a logbook loan:

• Over 18 and a UK resident 

• Be able to show that you can comfortably afford the repayments 

• Have a photo ID (passport, driver’s license, or CIS card)

• Own a vehicle which is clear (or nearly clear) of finance, which is taxed, MOT’d and insured. 

HOLIDAY LOANS

As simple as it sounds, this is a personal loan you take out to pay for a holiday. It can be a useful option for when you want to pay for a holiday but you don’t have the funds immediately. They are relatively short term and usually in amounts that range from £500-£5,000. 

Applying for a holiday loan is pretty similar to applying for any other loan. You’d need to provide some details about yourself, as well as having forms of ID to hand. You can apply over the phone, online, in a branch, etc. It is very important to make sure you’re in the best position possible to apply before doing so, which will increase your chances of being accepted. 

WEDDING LOANS

This is a personal loan you’d take out to pay for wedding expenses. They are a great option for those who have budgeted to pay for their wedding fees, but just don’t have the cash on hand to cover them immediately. There are some pros and cons to consider before applying for a wedding loan, see below:

Pros:

• They are a fast, easy way to cover wedding expenses quickly

• You can apply online

• You can receive payment in as little as one business day, depending on the lender 

• Paying them back on time can help build your credit

• They typically charge less interest than credit cards

Cons:

• They can sometimes tempt people into borrowing more than they can realistically afford

• Some have prepayment fees 

• It could be better to save up rather than finance it 

• You might be paying off the debt for years after 

SECURED/UNSECURED LOANS

With a secured loan, the borrower pledges some asset as a collateral. This means that the lender is entitled to take possession of the collateral, if the money is not paid back as agreed. Some assets you own that could qualify as collateral include: a paid off vehicle, money in a savings account, certificates of deposit and valuable property such as a house or car. This makes the whole process for the lender a lot less risky, (and of course, it increases your chances of being approved with less than perfect or no credit).  It is important to note that by taking out a secured loan, you are at risk of losing the asset you pledged as collateral - if you don’t repay the loan, you could lose your home or vehicle that guaranteed it. 

Secured loans are often used to borrow large sums of money, typically more than £10,000 and can be obtained from banks, online lenders or credit unions. The good thing about a secured loan is that you usually find the interest rate is lower than on a personal loan as it is secured against your assets. Also, repayments are normally made on a monthly basis; the amount of each month’s payment could vary depending on if the interest rate is fixed or not.

On the other hand, unsecured loans are much more straightforward - the money is borrowed and paid in monthly instalments, until the total amount is repaid in full. Although there is no collateral for the lender to claim if the money isn’t repaid, it damages the borrower’s credit score and the lender can take legal action to recoup some or all of the debt. Because there is no security on the loan, the interest rates also tend to be higher.