Borrowing money can be a hassle-free way of getting your hands on some much-needed cash. But when it comes to getting a loan, there are lots of options to choose from as well as a number of potential pitfalls.
Here’s our guide to the different types of loan available.
Aside perhaps from mortgages, this is the most common type of loan – when you see loan adverts or best-buy tables, they are generally referring to personal loans.
This is a loan for a specific sum borrowed over a certain period – usually between one and five years – at a fixed rate of interest. Borrowers repay a fixed amount every month until the loan plus interest is paid off.
Good news for older borrowers
Informative, in-depth and in the know: get the latest money news with Saga Magazine.
A secured loan is one which uses a borrower’s asset – such as a home or car – as security. This means that the lender has a claim on the asset if the customer misses repayments or defaults. A mortgage is a secured loan, for example, but personal loans are unsecured so borrowers are not at risk of losing any assets if they can’t make repayments.
A bridging loan is usually a short-term loan aimed at filling the gap between buying a property and receiving the proceeds from the sale of another one. This kind of loan tends to be taken out by property investors or buy-to-let landlords.
Five things to do before a loan application
Over the last few years, a new kind of financial product has emerged, known as peer-to-peer lending. This is a web-based service where individuals with spare cash lend it to other people.
The idea is that, by cutting out the banks, lenders get better returns and borrowers get cheaper loan rates. From a borrower’s point of view, taking out a personal loan from a peer-to-peer service such as Zopa or RateSetter is no different from borrowing from a bank, and rates do tend to be competitive.
How does peer-to-peer lending work?
These are very short-term loans aimed at people who are struggling to afford everyday expenses at the end of the month. Payday loans and lenders have come in for a lot of criticism over recent years due to the high rates of interest they charge and the penalties borrowers face for late repayment.
Overdrafts and credit cards
These are types of loans which are agreed in principle in advance – subject to certain limits – and which borrowers can use when they want.
Both are often very convenient ways of borrowing, but charges and interest costs can be very expensive. This is particularly the case for unauthorised overdraft borrowing (that is, going above the pre-agreed limit).
Subscribe today for just £12 for 12 issues...
Next article: Discover the most costly credit card errors >>>
Enjoyed this article?
You can find more of the same in our Money hub, offering advice, tips and news on all things financial, or you could sign up for our Money newsletter to enjoy more articles like this delivered to your email inbox each week!