What are the Different Types of Loans?Unsure on the difference between secured and unsecured loans? Click to find out more about the different loan types in the UK.
There are several different types of loans available in the UK. Each loan type is taken out for a specific reason and comes with its benefits and considerations. Before you apply for a loan, fundamentally, you ought to know which loan type best suits your financial situation.
Our debt consolidation loans can be used to pay off different types of loan debts. We’ve included some of the most common ones below, with a brief outline of what they are and what they are used for.
We have supported thousands of people in taking control of their finances and repaying different types of loans.Get My Loan
Unsecured vs Secured Loan - what is the difference?
The difference between unsecured loans and secured loans is the type of contract that is signed before loan approval. Secured loans require an asset to be pledged as collateral in the case that the lender fails to repay the amount borrowed. Unsecured loans do not require this.
Here are some other key differences between unsecured and secured loans:
- Usually have lower interest rates.
- Longer approval process.
- Longer repayment plans.
- Larger borrowing amounts available.
Some examples of secured loans include:
- Home equity loans
- Mortgage loans / second mortgage loans
- Auto loans
- Home improvement loans
- Boat loans
- Usually have higher interest rates.
- Quicker approval process.
- Shorter repayment plans.
- Smaller borrowing amounts available.
Some examples of unsecured loans include:
- Student loans
- Payday loans
- Unsecured credit cards
- Store cards
If you are looking to repay unsecured debt, a debt consolidation loan may be a suitable option for you. Debt consolidation loans allow you to combine multiple debts into one affordable monthly payment, making your finances much simpler to manage!Consolidate My Debts
What are personal loans?
A personal loan is a type of unsecured loan. This type of loan is versatile and can be taken out for almost any reason, making them a suitable option for a lot of people.
What are personal loans often used for?
- Financial emergencies
- Paying for car repairs
- Funding a wedding
- Making home improvements
With personal loans, interest rates vary from lender to lender and can be hard to give a general idea of what interest rates you could be charged. Some personal loans come with variable interest rates, which means the amount of interest you are charged can fluctuate over time. On the other hand, some personal loans offer fixed interest rates, which means the interest you face can not change.
If you are looking to take out a personal loan, it is recommended that you try to find one with a fixed interest rate. This is so you can avoid large increases in interest and save money in the long run.
The repayment terms of a personal loan can also vary depending on your choice of lender. However, typically the larger the amount borrowed, the longer the repayment period.
You can apply for this type of loan with online lenders and private lenders.
What is a credit card?
A credit card is a plastic card that signifies a credit agreement between a borrower and a financial institution, such as a bank. A credit card allows people to borrow money to pay for goods or services and repay the money at a later date. If the money is not paid back within a certain period, the card provider often adds interest and charges to the amount owed.
The interest rate on credit cards varies depending on the card provider, but the average interest rate (APR) on UK-issued credit cards is 21.46%.
These large interest rates can make it hard for people to repay credit card companies. This is because if the interest rates are implemented, the borrower repays more than the original loan amount. This can cause people to acquire significant levels of credit card debt.
If you are considering taking out a credit card, you must repay your credit card balance in full before you are charged interest. If you are unsure that you would be able to pay it back in time, a credit card may not be the most suitable credit line for you.
If you are struggling to repay credit card debt, our team may be able to support you by consolidating your debt repayments into affordable monthly payments.Consolidate Credit Cards
What is a store card?
A store card is a type of credit supplied by retailers. They are designed to allow people to pay for items in instalments.
People are often attracted to store cards as they are sometimes offered as part of a promotional period. However, store cards usually have high annual percentage rates (APR%), which means that they often benefit the retailer more than the customer.
Store cards can be particularly dangerous in comparison to other lines as no affordability checks are done before approval. This means credit scores are not taken into account, and so even people with poor credit can be approved for this type of loan.
What are payday loans?
A payday loan is a short-term loan agreement that consists of borrowing a small lump sum. Such loans are usually taken out to cover an unexpected payment that the borrower cannot afford to pay at the current moment.
Essentially, a payday loan is a cash advance on your paycheck. It is advertised to be a good solution for those who are struggling in-between paydays.
Common reasons to take out a payday loan include:
- To fix a household necessity.
- To repair a broken car.
- To cover an essential bill.
This type of loan comes with high-interest charges that are implemented when people fail to meet their fixed monthly payments. As a result, they often cause people to rack up significant amounts of debt. Therefore, you must be confident that you can repay the full loan amount to payday lenders before you take out this type of loan.
If you are looking to take out this type of loan, we recommend taking a look at your credit history before applying. Having too many loan applications on your credit file, or being rejected for any loan type can cause you to have a low credit score.
You can check your credit score using Experian consumer services.
Key take-away points
Here are some key points to summarise the above information:
- There are many loan types available in the UK.
- You should always do your research and compare loans to find out which credit line is best suited for you.
- Before taking out any type of loan, you should ensure you can afford the loan repayments.
- If you are in debt, you should look into the debt solutions that are available to you.
APRs from 5.8% to 89.9%
We are a broker, not a lender.
Unsecured Loan Representative 69.9% APR
Borrowing £7,500 over 36 months, repaying £502 per month, total repayable £18,083. Total cost of credit £10,583. Interest rate 69.9% (variable). The lenders on our panel offer loans for 12-60 months, with rates from 5.8% APR to 89.9% APR. The Representative Example is based on all loans paid out by lenders between 19th Apr 2022 and 23rd Dec 2022.
Secured Representative 11.7% APR
If you choose to add fees to the loan: Assumed borrowing of £25,000 over 120 months, plus a broker fee of £2,500 and a lender fee of £250 would result in monthly repayments of £345.55, the borrowing rate is 8.6% (variable), the APRC is 11.7% (variable), total charge for credit £16,466.00 and the total amount payable £41,466.00. You can opt to pay the lender and/or broker fees upfront, your adviser will discuss these options with you.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured on it. All rates vary subject to loan amount, loan type and status. Repaying your debt over a longer period of time may increase the amount you pay.