The concept of loans is not an unfamiliar one, in fact, it is one of the most widely used financial benefits in the world.
But what does taking out a loan mean?
It means that you can borrow a certain amount of money from the bank, only if you agree to pay back the borrowed amount within a certain period of time and with interest.
But there are certain prerequisites for taking out a loan, the main one being, you need to have a good credit score if you want to take out a loan.
Having a good credit score not only helps you secure a loan but it also helps you get it more easily and with relatively lesser interest rates.
Truth be told, you can secure a loan even if you have a decent or poor credit score, but the rate of interest charged will be much higher.
There are several reasons why people take out a loan. It could be either to buy a vehicle, or a house, making large purchases, or to consolidate their debts.
You should also be aware of the fact that there are several different types of loans that you can take out depending on your need.
When you’ve taken out loans, you can use loan calculators to calculate how much you owe to the bank.
Read on further to know about it.
Different Types Of Loans
As mentioned above, there are several types of loans that you can take out as per your needs.
Here is a list of different types of loans that you can secure. There are mainly two types of loans that you can acquire from the bank, they are secured loans and unsecured loans.
Let us get right into it
In simple terms, an unsecured loan is a type of personal loan that is not connected to any of your assets. If you want to obtain an unsecured loan then the financial institution will look at your credit profile and your financial situation. The period of this loan can range anywhere from one year to seven years. These loans are usually used by people to borrow small amounts of money.
The advantage of unsecured loans is that you do not have to provide a collateral for the loan you are securing, unless you’re a part of a bigger financial scheme that may include personal assets.
Even though the term unsecured loans are correlated to traditional loans, this concept may also apply to short term loans and payday loans.
You should also know that the rates of interest are pretty high when it comes to unsecured loans.
A secured loan is a loan in which the financial institution requires a collateral from the borrower. The asset can be either a house, car, or any other property that can be used by the financial institution to recover the loan if the borrower defaults it. The loan lending limits when it comes to secured loans is much higher compared to unsecured loans. This is because the financial institution has the collateral offered by the borrower, in the event the borrower defaults the loan. This acts as an added security measure for the financial institution.
Payday loans are a form of short term loans in which the borrower borrows money from the bank and repays it when he gets paid next.
The typical payday loans are required to be paid within a time period of 1 – 30 days, although the time frame for returning the borrowed money varies from lender to lender. When the time comes for the borrower to pay the money back, he is required to pay back the loan in its entirety with the interest levied on it.
Payday loans are usually for small amounts of money. The borrower can get this loan almost on the same day he applies for it, that is why it is also referred to as “instant loans”. But bear in mind that payday loans have a huge interest rate, which may make it difficult for a few people to pay back the loan on time.
That is why you should make it a point to go through all the details related to payday loans before you apply for one.
Short Term Loans
Short term loans are loans where the financial institution lets you borrow small amounts of money that you are required to pay back within a year, although the time frame may depend from lender to lender, the time frame of repayment is shorter than most of the traditional loans offered by financial institutions.
Moreover, the interest rate associated with short term loans are higher than traditional loans. This may be a hindrance for quite a few people, although the interest rate differs from lender to lender, most of the time the interest rate is very high when compared to other types of loans.
Bad Credit Loans
These loans are mainly meant for people who have bad credit scores and history. This can be due to many factors like for example the borrower may have defaulted their previous loans due their inexperience when it comes to handling loans or they just may have gone through a bad financial situation.
Bad credit loans, just like short term loans have higher interest rates compared to other types of loans. This is done mainly to decrease the risk the lender may face in the event of a loan default.
When you apply for a guarantor loan, you are required to get another individual along with you because if you are unable to pay the loan, then that individual (guarantor) will be required to pay back the loan on your behalf.
Usually the guarantor can be anyone who meets the requirements of the bank. If you have a bad credit history then a guarantor can help you secure a loan with a relatively lower interest rate.
These are some of the different types of loans that are available in the UK. When you apply for a loan make sure you go through all the details related to that loan and also make sure you check the rate of interest.
Furthermore, when you have done the above stated make sure, you only take the loan if you’re sure that you will be able to pay back the loan on time. Because if you fail to do so, you may end up in debt, which is worse. So make sure you do not put yourself in a situation where you get pulled into debt.