What are the Different Types of Loans?

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.

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:

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

Unsecured 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!

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.

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.