The opening up of the personal finance industry has been hugely beneficial to consumers. We now have masses of choices when it comes to selecting the right financial products for our needs. We also have the internet to help us research our options. However, getting your head around the personal loan market is still not always easy. In this article, you’ll be understanding personal loan options and types explained.
From online payday and installment loans to unsecured, longer-term personal and bank loans. What’s best, and what will work for you? Here’s a short guide to help you understand your options and make the right choice the first time.
What are the main types of personal loans?
There are several types of a personal loan to consider, but first you must decide whether you want a secured loan or an unsecured loan. What’s the difference? Read on.
Secured loans: Understanding Personal Loan Options & Types Explained
Like mortgages, secure loans require an asset to be offered to the lender as security. If you cannot make repayments, the lender can force the asset’s sale to cover the cost of repaying the loan. These loans usually come with lower interest rates, can be of higher value, and are repaid over a longer period of time. However, they carry major risks for the borrower, who stands to lose their home if they fall on hard times.
Remember that secured loans may enable borrowers to enjoy lower interest rates since they present a lower risk to lenders. But, you should make sure that the requirements for a personal guarantee when it comes to a secured business loan.
For convenience, you can try a free online loan calculator that helps to estimate the monthly loan payments, interest rate (%), and amount per installment. Consider a compound loan calculator that estimates the principal amount by providing the different compound frequencies (weekly, biweekly, monthly, yearly, and quarterly). Well, there are key points that you should beware of about secured loans:
- Secured loans are specifically secured by collateral, which can include physical assets like vehicles and property or even liquid assets such as cash.
- Remember that both personal loans and business loans can be secure.
- Banks, credit unions, and online lenders can provide secured personal and business loans to qualified borrowers.
- When it comes to a secured loan, the interest rates, loan terms, and fees can vary widely, depending on the lender.
Once you get the secured loan, use a simple loan repayment calculator that shows you the complete repayment amortization schedule; also calculate the interest rate you need to pay during loan repayment.
Unsecured loans
You can take out these loans without putting up security, such as a property. Instead, lenders decide as to whether to lend to a borrower by checking credit records and affordability. They usually carry lower values and shorter terms than secured loans and can cost more in interest. However, you cannot lose your home if you default.
We will focus on unsecured loans here as they make up most personal loans available to consumers. Here’s our rundown of the main types:
Payday loans: Understanding Personal Loan Options & Types Explained
These are low-value short-term loans taken out to meet costs over a period of weeks, up to a month or two. Traditionally, payday loans are repaid on the day your salary hits your bank account. However, over recent years, the marketplace has opened up to more flexible payday lending, mainly in installment loans.
Installment loans are still super quick and simple to apply for online, but they can receive a payment again over several months. This makes them more affordable to more people and less likely to lead to additional financial problems. Even so, these short-term loans still come with relatively high interest rates and can also carry extra charges, especially if you are late making a repayment, so check the terms and conditions carefully before you commit.
Why might you need a short-term loan?
Short-term loans, such as payday and installment loans, are helpful in a financial emergency. However, some months, you might find yourself short of cash to pay for an unexpected expense, such as a car breaking down.
The boiler stops working, or some emergency dental work is needed. If your children come home with a letter from school asking for payment for a trip as soon as possible or you need to buy expensive medicines that you can’t afford right now a quick loan might help you out. Understanding these personal loan options.
If you regularly take out loans to cover everyday expenses, you need to examine where you can make savings or increase your income, as borrowing in this way is not sustainable.
Longer-term online loans
You can apply for longer-term personal loans through an online bank or lender. These loans might be worth between £1,000 and £20,000 and may be repayable in between 1 and 10 years. The amount you are in and the time you must repay will depend heavily on your credit rating. So, a healthy regular income and employment status.
Interest rates on longer-term loans are lower than those charged on short-term loans such as payday loans. However, compare providers by looking at their Annual Percentage Rate (APR), which should be clearly displayed on their website. This shows the loan cost as a percentage of the amount you borrow for an entire year, including any charges or fees.
Traditional bank loan: Understanding Personal Loan Options
You can still approach your bank to ask for a personal loan if you prefer to go the traditional route. Banks offer some decent personal loan deals these days, following the influx of competitors online. They have had to become more flexible and respond to interest rate competition to survive in the Open Banking era and against challenger banks.
A high-street bank will assess your ability to repay a personal loan in a similar way to an online lender, although they may be more risk-averse. Therefore, if you have a less-than-perfect credit rating, a high-street bank might not be the best place to find a good deal on a personal loan.
