6 Types Of Loans You Should Know

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Loans are a fantastic method to expand your financial reach. A lot of people shy away from loans, seeing them as an admittance of financial failure, but that’s not the case. 

Using your credit to your advantage can give you access to more money than your salary alone.

Loans allow you to pay for expensive purchases which you wouldn’t be able to afford otherwise. They help you stretch your financial reach while staying safely within your budget.

To help you find the right loan, speak to a professional such as https://www.loancorp.co.uk/. We can get you started by breaking down the 6 most important loan types.

Secured loans and unsecured loans

A secured loan is any type of loan taken out against something of value. This valuable item is considered collateral. If you cannot pay your loan, that valuable item is given to the lender as payment instead.

Types Of Loans You Should Know

Many people use their homes, cars, or jewelry as collateral. It doesn’t matter what you put forward, as long as the value matches or exceeds the amount you wish to borrow.

If you sell the item before your loan is repaid, you will be in breach of your contract.

Because the loan is secured against an item of equal value, the lenders are more likely to accept your proposition.

Whenever you are rejected by a lender, this information is added to your credit history, making everyone aware that you are a risk. Using a secured loan can help prevent this black mark and get you the finances you need

Unsecured loans are the opposite

They are any type of loan that isn’t backed up with a collateral item. Unsecured loans are more common than secured loans, however, because there is less security for the lender they are harder to obtain.

If you have a good credit score, you shouldn’t have a problem obtaining an unsecured loan.

Auto loans

Auto loans are specially created for automobiles - aka cars, motorbikes etc. Most people need a vehicle to travel to work or live their life with freedom. However, cars aren’t affordable without receiving financial help.

Auto Loans

Auto loans are a type of secured loan. If you cannot pay the monthly fees, the car will be taken off you as collateral payment.

“Term” is the jargon used to explain how long the loan is in operation. A 36-term loan is active for 36 months or 3 years. Auto loans have a relatively short-term time as most loans take decades to pay off.

If you buy a car on finance, you are using an auto loan. Most car finance lenders offer you a new car near the end of your contract

Because they have a history with you, they can see the level of risk is low. This is especially true if you never made a late payment. This means the loan charge will be lower with your current lender than switching to a new one.

However, if you continue to pay off the car finance instead of getting into a new contract, you will end up owning it outright. 

To save money, pay off your first loan and keep your car until it is no longer functional.

Student loans

Student loans are technically a type of unsecured loan. However, because they are offered to you by the government, they work on a different process than normal loans.

You will not see the financial payout of a student loan. Instead, the government pays your loan straight to your university.

Paying back the loan is just as disconnected. You don’t need to make direct debits, as your employer will organize your repayments just as they organize your tax payments.

To repay your student loan, you need to earn over a certain amount. The government will not expect repayments until you hit that figure - from that point the repayments will be automatic. 

These loans also do not require a credit check. This is because they are betting on your future, not on your current financial situation.

However, if you receive a student loan from a private lender these rules do not apply. You will have to manage your loan upfront, pass a credit check, and repay the loan based on the contract provided.

Private student loans should be avoided, unless absolutely necessary. This is because governmental loans are a lot more forgiving, easy to access and allow for an income-based repayment plan.

Mortgages

Mortgages are normally the largest and longest loan a person will apply for.

Mortgages

Mortgage loans pay for the price of a property, not including any down payments the buyer has made. Due to the large financial cost, the lender will almost always require collateral from the property itself.

This means failing to pay the mortgage, will give the lender permission to evict you from the home and claim it as their own. 

Evictions and court cases often take more time and money than they are worth. This is why a lender will not set up a loan with you without first believing you can pay them back.

Instead, the lender would prefer a smooth loan journey. This means ensuring the agreement is achievable based on your income and expenses

If the lender doesn’t believe you can pay them consistently for the full term, they will not approve your loan.

When you take out a loan, there is one question you need to consider. Do you want a shorter term or smaller payments every month? Lenders use that information to create a final plan. 

Mortgages usually last for 30 years, however, if you have the financial ability to pay more every month you can reduce this term time to 25 years or less. Alternatively, you could pay less every month and push the term time to 50 years.

Depending on your age, the lender may limit the term length maximum, and depending on your income, they will limit the maximum monthly payment. The rest is up to you.

Debt consolidation loans

Consolidation loans are designed to hold all of your debts in one place. If you have multiple credit cards or small loans you’ll be paying more interest than you need to.

A debt consolidation loan pays off all of your debt. Instead of owing multiple lenders, you end up owing just one.

This singular loan will cost you less overall, as you’ll be paying one interest fee each month instead of multiple.

Interest fees consist of a payment towards the lender along with a percentage of how much you still owe. With just one payment towards the lender to consider, this means the charge will be less overall. 

Because multiple loans will be paid off in short succession, your credit score will get a boost. 

This loan should also be easier to pay off, as your total payments and predicted interest growth will all be in one place. You no longer have to monitor multiple lenders.

These loans are normally unsecured. They usually have a fixed interest rate to help create a sense of predictability.

Payday loans

Payday loans are the shortest type of loan you can apply for. They get their name due to their 1 month term time. These loans allow you to borrow small amounts of money and expect a repayment in 30 days. 

Debt Consolidation Loans

The idea is to help you pay unexpected expenses, then return the funds with your next paycheck

For example, if your car broke down at the end of the month, and you don’t have enough money to pay for a mechanic, you can use a payday loan.

The finances will arrive in your bank account within minutes, allowing you to repair your car as soon as possible.

These types of loans don’t require a credit check because they will charge you a high-interest rate regardless of your circumstances.

Remember that credit scores often help lenders offer you lower interest rates - payday loans lenders don’t look at this information and simply charge you a high rate, knowing that you are desperate .

You will be changed every day until you pay back the loan, and if you don’t pay back the loan within 30 days, your credit score will drop. The lender has the right to call bailiffs to collect the owed debt.

However, they may offer you another loan to pay for the first. This often starts a debt cycle. Avoid these offers.

Payday loans shouldn’t be used unless you are in desperate need and know you can pay back the debt in time.

Summary

Every loan can be separated into the secured or unsecured category.

The other 5 types mentioned are the most common. If you’re buying a house, you’ll need a mortgage. If you’re going to university you’ll need a student loan. If you need your own car, apply for an auto loan.

These loans are designed to help you reach your financial potential with ease, as you stretch your financial reach.

Debt consolidation loans are designed to help manage your debts. Whereas payday loans help you receive emergency funds quickly.

About the author 

Peter Keszegh

Most people write this part in the third person but I won't. You're at the right place if you want to start or grow your online business. When I'm not busy scaling up my own or other people' businesses, you'll find me trying out new things and discovering new places. Connect with me on Facebook, just let me know how I can help.

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