What Type of Loan is Right for You?

Need some help deciding which loan best fits your requirements? 

How do you decide which lender to work with, and which loan product to take advantage of, when there is so much competition? In this guide, we cover the basics from top to bottom, to help you to make an informed decision.

First, what is your reason for borrowing?

What kind of loan you should look into is usually determined by why you need the money and what you plan to do with it. 

Borrowing for a vehicle or a house is quite different than taking out a loan to finance a vacation (Best Budgeting Apps).

You may need a loan for the following reasons: 

• A car purchase
• A home purchase
• Consolidating debts
• A wedding
• Making a big purchase
• Budgeting for a trip
• Renovating your house
• Creating a new company

Next, know your two main options, and other choices…

When you need to borrow money, it might be difficult to figure out what kind of loan would be appropriate for your situation. It might take a lot of time to shop around for a loan and find the best deal once you've factored in the APR, term length, fees, and likelihood of approval based on your credit history. 

This article will help you narrow down your options by providing a side-by-side comparison of the most common loan kinds, along with a discussion of their benefits and drawbacks. Which loan options are most common? There are primarily four kinds of loans available:

Different types of loans include: 1) home-owner secured loans and 2) personal unsecured loans. But you also have others, like guarantor loans, and payday loans.

The usual conditions of each loan kind are shown below. Although you may be able to borrow more or adjust the payback time by contacting a lender directly, especially if you already have an account with them, the document only gives broad information on what is available for these products.

Your name, home address, birthdate, and some basic financial information are all that will be required. Popular comparison tools will rank over 20 different lenders, which can include online brokers, to find the best loan for your needs. It checks your credit without negatively affecting your score and then recommends loans you are most likely to get approved for. 

1. ★ Should you get a secured loan?

Should I choose a secured loan, and what does it mean? 

You can get a loan that is secured against an asset, most often your house, by applying for what is called a secured loan, homeowner loan, or second-charge mortgage. Interest rates for these loans are often lower, resulting in cheaper monthly payments. 

The overall amount you pay back (with interest) throughout the life of the product, however, may be much greater because of the often much longer repayment period. You should also consider whether or not you can afford the monthly payments, since failing to do so might result in the foreclosure of your house. 

If you take out a secured loan, you're promising to the lender that, in the event you stop making payments on the loan and go into default, they may sell or otherwise take possession of an asset of yours. The term “security” refers to the item pledged. When they repossess the security you've pledged, they'll sell it to pay off the debt you owe on the credit line. 

A mortgage is the most common kind of secured borrowing. Mortgages are one kind of collateral, but there are other options as well. Pawnshop loans are secured by personal property, such as jewels, whereas logbook loans are secured by the borrower's vehicle.

If you want to borrow more money, you will have a better chance of getting a loan if you present something as collateral for the loan. What's the rate and term of this loan?

Why a secured loan is preferable?

Because the lender is taking on less risk, the interest rate is usually cheaper than with other types of borrowing. You may borrow a bigger amount if necessary. If you take out the loan with your current mortgage lender, it can be simpler to handle the repayments because it is all in one place.

Why a secured loan can have drawbacks?

If you can't make your payments, you could lose your house (or whatever collateral you used to secure the loan), you could end up paying more in interest over the life of the loan, the application process could take longer to complete because a valuation of your property or collateral is required, and you could be subject to an early repayment charge.

2. ★ Or an unsecured loan…?

Is an unsecured loan best for me? 

An unsecured loan, often known as a personal loan, is not tied to any specific property as a secured loan is. The application procedure is simple, and the funds may be deposited in your account fast. You may not be able to borrow as much, and the interest rates are significantly higher. 

Your real annual percentage rate (APR) may be higher than the sample APR shown in advertisements since it is based on your individual circumstances, which might result in higher monthly payments. When compared to a secured loan, the total amount repaid is often less for an unsecured loan borrower since interest is accrued over a shorter period of time. 

Even if your house is safe from foreclosure, you still need to be sure you can afford to make the monthly payments or risk damaging your credit score. Future access to other types of financing will be severely hampered as a result of this. You may get the money you need without risking your goods or assets by opting for an unsecured loan.

Borrowers in the UK may choose from seven different forms of unsecured loans, each of which is available for a different maximum loan amount and repayment term.

Why an unsecured loan would be preferable?

There is less risk than with a secured loan because there is a lower chance of losing your home if you don't keep up with repayments. There is usually no early repayment charge, so you can pay the loan back as quickly as you like. The payments are consistent and easy to budget for because the interest rate is usually fixed.

Why it's not a good idea to get an unsecured loan?

Unsecured loans often have a larger monthly payment than secured loans, and borrowers with low credit histories may be ineligible for unsecured loans altogether.

Which one is better?

You should be sure of how much of a monthly payment you can easily make to a lender before you apply for a loan. 

This is vital not just for the lender's sake, but also for yours; if you take out a loan that is too large for your budget, you may have trouble making ends meet throughout the loan's repayment term unless you drastically reduce your expenditure.

3. ★ How about guarantor loans?

What exactly is a guarantor loan and should I get one?

Simply put, a guarantor loan is a personal loan in which another responsible adult (often a family member) agrees to assume responsibility for the loan's repayment in the event you are unable to. 

It's something to consider if you have a spotty credit history or no history at all since you've never signed any credit agreements in the past. It means you may apply for a loan again even if you've been turned down in the past. 

What are the benefits of a loan with a guarantor?

When you take out a personal loan with a guarantor, that individual guarantees to make the payments in your place if you are unable to. Interest rates may be more reasonable than for borrowers with bad credit since the lender has collateral to guarantee repayment.

What are the drawbacks?

The guarantee must have faith in the borrower's ability to make payments and the guarantor's role must be limited to that of an insurance provider. The person who is going to act as a guarantor needs to have a good credit rating in order to be accepted in the role.

The money can take longer to reach the end borrower because it first goes to the guarantor as part of a 14-day cooling-off period. This period is in place in case the borrower decides they no longer want to be a part of the agreement.

Getting a guarantor

It's important to verify a guarantor's details before including them on an application. Given the scope of the project, they should have solid financial standing and a significant amount of equity in their property (at least 50 per cent). If you wish to borrow money in this manner despite your poor credit, your guarantor should be able to attest to your reliability. 

You may be able to borrow money even if you've been turned down for loans in the past. The interest rate is often much lower than it would be with an “impaired credit” loan.

4. ★ Are payday loans your only option?

Can I benefit from a payday loan, and what exactly are they?

Payday loans, also known as short-term or cash advance loans, are often not the ideal financial solution for anybody. There is still a genuine possibility of individuals who use payday lenders end up with significant financial issues, despite the fact that they are subject to stricter regulation. 

Payday lenders are notorious for charging outrageous interest rates, often as high as 500%. Despite the fact that many of the industry's big players have gone out of business, payday loans are still widely accessible.

Whether or not this is a good thing is highly debatable. Payday loans still have a place, but only in very rare circumstances when the loan amount is modest and is repaid rapidly.

Drawbacks of getting a payday loan

Payday loans may have major repercussions, including substantial damage to your credit rating if you are unable to make your repayments on time. This can make it difficult, if not impossible, to get future credit, such as a mortgage.

Our article “Where to get free debt advice” includes resources to aid those who are having trouble keeping up with their financial obligations. Read our article “What is the best way to consolidate my debt?” for more information. 

Before choosing your loan…

What kind of loan will best suit my needs?

Asking yourself the following questions will help you make a well-informed decision:

1. How much financing do I need? 

A secured loan often allows you to borrow more money and have lower monthly payments, but the loan's duration is typically longer and the total amount paid in interest is usually higher.

Secured loans typically start at around £10,000 but may be as little as £3,000. We address why a credit card might be a better option than a loan if you need to borrow a smaller amount of money later in the article.

2. How long will I have to make the repayments?

Paying back a larger sum over a shorter period of time can reduce your interest costs. This is the case if you have the financial flexibility to do so. You don't have to put up your house as collateral for an unsecured loan, so it's a safer option if you can afford it.

However, you should think about how much you can afford to pay back every month, since falling behind on payments might harm your future borrowing opportunities.

Is your credit in bad shape? If you answer “yes”, you may be forced to take out a secured loan at a higher interest rate or, if you can't locate a cosigner, a guarantor loan.

When you've settled on a loan and want to apply, check out our article “How to Apply for a Loan” for tips. If you need a smaller amount than £3,000, you may want to consider a balance transfer or money transfer credit card arrangement as an alternative to a loan.

If you are diligent and able to repay the loan in full before the conclusion of the interest-free term, you will have additional options for handling your debt. 

Instead of getting a loan, you may save up the money you need over time. Check out our savings best purchase tables and review of the top UK savings apps to begin started, or use a budgeting app (there are reviews of some of the finest in that post).

How lenders decide… 

What factors do lenders consider when deciding whether or not to provide a loan? There are a lot of criteria that will determine how much you may really borrow, including:

• the present state of affairs in terms of money, especially monthly spending capacity
• details on your credit history and
• the reliability of your family's financial situation (top savings accounts)

Some lenders may be willing to cooperate with you while others could say no if they determine that you are applying for a loan amount that is outside of your financial means.

Bad credit loans, payday loans, short-term loans (sometimes known as instalment loans), guarantor loans, and logbook loans are just some of the specialised financial products available to individuals with low credit histories. The interest rate on these loans is greater, so borrowers know they'll have to pay more back.

Having a solid credit history will open up more options for you when it comes to loans, and the interest rate you'll pay will be cheaper as a result. Learn how to improve your credit rating.

Why do most people take out loans?

People seek loans for a wide variety of reasons. Having enough money in the bank to pay for emergency needs such as a vehicle repair, boiler replacement, or medical bill is important to some more than others.

For others, it may be in order to pay for far more extravagant things like a new automobile, a renovation to their house, or the trip of a lifetime.

Having debt isn't always a negative thing until it becomes unmanageable or prevents you from providing for yourself and your loved ones. You should only decide to get a loan if you have a reliable source of monthly income and can commit to paying back the principal and interest on time every month for the life of the loan.

Where you reside in the nation might affect how much of a loan you will need to take out. Borrowers in London often pay higher interest rates for home renovation loans than borrowers in Scotland. You should always go with the lowest price offered by a service provider, and you should look around for the best financing option.

Summary…

Our mission is to simplify the banking and lending process by connecting borrowers with banks and other financial institutions who are eager to provide loans. By using this route, we are able to save time and resources for all parties involved in the process of matching borrowers with lenders.

It just takes a few moments to go through the whole process and have us show you the greatest offer we've located, complete with simple language that even a non-lawyer could comprehend.

However, you should be wary of borrowing when desperate, as it can dig you deeper into a hole.

Related Guides:

• Pros and Cons of Personal Loans
• Why You Should Avoid Payday Loans (In 2023)
• Best Secured Loans For Bad Credit
• Best Secured Business Loans