Different Types of Loans in the UK

Taking a loan can be crucial in relieving some financial stress. Although loans come with some added interest, they’re an essential evil. Generally, loan repayment in the UK is spread across a few years. The length of time it takes to repay a loan varies according to the different types of loans in the UK and repaying a loan early may attract some charges.

Everyone eligible to borrow money from lenders should know the types of loans available, how they work, and which will be most suitable for your circumstance. Some loans will help you pay off debt, pay fees, or buy a car. These loans may be tied to one of your valuable properties or not. But they sure have an expiry date.

Two Major Types of Loans

Loans come in 2 different stakes: one that is tied to your asset (called secured loans) and another that is not staked on anything (called unsecured loans).

Secured Loans: Lenders secure themselves against the borrower in this kind of loan by staking repayment on one of their valuables. Sometimes, they may stake repayment on the property that the borrower used the borrowed money to purchase.

So, assume you’ve approached the bank for money to buy your house. The bank requires you to stake a valuable property that they can sell if you default with repayment. In the case where you don’t have an existing property, you can stake the house you want to buy. If you are unable to complete your repayment at the end of the term, the Bank reserves the right to take the house from you.

Unsecured Loans: With this type of loan, borrowers don’t need to stake any of their valuables to get the money they need. There’s also no way for the lender to come after them if the borrower does not go through with the repayment. As a result, lenders charge higher interest to cushion the effect of bad debt. Unsecured loans also have far-reaching effects on a person’s credit score. You can get PayDay loans with very bad credit in the UK.

If you choose to take an unsecured loan, you’ll need to have a good credit history to be accepted by a lender or to get interest rates. An unsecured loan is more favourable in many situations because they offer you the flexibility to work out your repayment without any pressures. Being responsible for your repayments will improve your credit score and give you access to low-interest loans.

Types of Loans in the UK

There are many types of loans available for different circumstances. In borrowing, some projects require a secured loan and others require more flexibility. What makes the difference often is the amount of money you need to borrow for your project. While unsecured loans usually have a limit of £25,000 or £35,000, secured loans can go as high as £200 million depending on the need.

Here are the types of loans available and what they are used for.

Unsecured Loans

  • Unsecured Personal loans
  • Guarantor loans
  • Peer to peer or social loans
  • Bad credit loans
  • Unsecured debt consolidation loans
  • Business loans

Secured Loans

  • Secured personal loans
  • Homeowner loans
  • Vehicle finance
  • Secured debt consolidation loans
  • Logbook loans
  • Bridging loans

Personal Loans

People can either take secured or unsecured personal loans. This type of loan is fixed and used for such projects as home improvement, a holiday, or buying a car. The repayment is spread across a period, often indicated by the borrower. Secured personal loans are often taken against tangible projects like buying a car. That way, if the borrower defaults, the lender takes the car away. These can be done as short term loans in the UK with a minimum loan length of 3 months.

If you need to borrow for other projects like a holiday, you’ll need to take an unsecured loan. However, your credit history has to reflect that you are a responsible borrower. As such, you’ll be able to get a loan at a low rate.

Peer to Peer Loans

This type of loan is also called a social loan. It is an online platform where people pull their money together and give a lump to someone who needs to borrow. The borrower may be an individual or a small business.

Usually, lenders on a P2P platform do not give their money directly. They work through an intermediary who connects them to people that need to borrow. This lending system is as risky as it is rewarding for the investor.

One reason you should consider taking a loan on this platform is that the interest charged here is lower than those of the bank or traditional creditors. As always, you’ll have to show good credit history to get competitive loan rates on this platform.

Guarantor Loans

This type of loan is helpful for people whose credit history gives creditors a second thought at taking them on. These include people without a credit history and those with bad credit history. A guarantor signs on behalf of the borrower. This shows that he is willing to pay off the debt if the borrower cannot payback.

If you choose to take a guarantor loan, you’ll need either a family member or a friend to guarantee you. That way, your lender will be more willing to take you on as a risk. If you default, your guarantor will be required to pay back what you owe. Also, your credit score will be affected badly. When you go for quick PayDay loans you can have the money in your account in around 9 minutes after the application is complete.

Bad Credit Loan

With a bad credit score, you can take a personal loan that has a high-interest rate. Not all lenders take on people with bad credit, and there’s no guarantee that those who do will be willing to take you on. It all depends on your situation; what you are borrowing for and how much you want to borrow. You can get a £100, £200 & £500 pound PayDay loan in the UK even if you have bad credit.

Bad credit may result from defaults in paying off loans borrowed within the last 6 years. It may also be because you have never borrowed before. Whatever the case, lenders are usually wary of taking on bad credit borrowers.

A way to understand the cost of bad credit loans is to look at the average APR for personal loans. Average APR for normal loans is often at 3% while that of bad credit is as high as 49%. Some borrowers may even get higher APR.

Debt Consolidation Loans

A debt consolidation loan can either be secured or unsecured. This type of loan helps you to put your debt together in one place and be able to pay it off. If you take a secured loan, you’ll have to stake a property that is worth the amount of money you are taking. Of course, this allows your creditor to take the property from you if you default.

If you must take a debt consolidation loan, make sure it won’t cost you more to pay off. Debt consolidation helps you see how much you owe in one glance and manage the payment. But, if you are not careful, it might increase your debt and take longer to pay off.

Some lenders may offer you debt consolidation at a lower APR, making it easier for you to deal with your debt. A good comparison of offers from creditors will help you make a good decision.

Bridging Loans

Sometimes, you may need to pay off a tax bill or for a property but not have the money readily at hand. Taking a bridge loan helps you to settle the problem while you wait for the money to become available. This type of loan is often taken for a limited time but requires an asset with high value to secure it.

You can either take an open bridge loan or a closed bridge loan. Open bridge loan has a higher interest rate and does not have a defined end date. It may stay open for over a year until you can pay off the bill. Closed bridge loans require you to pay off within a few weeks or months, but they also have a cheaper interest rate.

Bridging loans also offer fixed rates or variable rates. The variable rate is bound to fluctuate according to the rate dictated by the bank of England. However, fixed rates stay according to the terms of the agreement.

Homeowner Loans

Homeowner loans are offered to people who have equity in a property or who own a home of their own. This type of loan may help you to improve your home or consolidate debt. You will get anywhere between 1 year and 35 years to pay back the loan.

A homeowner loan is a secured loan. You will have to stake it against your property equity or your home. As such, you’ll need to be careful about taking this loan as you will end up losing the property if you are unable to pay back.

Vehicle Finance

Whether you want to buy a used car or a new car, vehicle finance will help you. You’ll have to stake the loan against the car; it is a secured loan. A car loan terms of contract describes that you are not the owner of the car until you have completed payment for it. If you are unable to pay back, the lender takes the car from you.

To get vehicle finance, you’ll need a good credit history. Apart from traditional lenders, you may get a car loan from a car dealer. Bear in mind, however, that a car dealer’s rate may be higher than the traditional rate.

Frequently Asked Questions

If I have equity, can I use my home to get a loan?

You can get a loan with your home equity, depending on how much you are borrowing and what your home equity is. You need enough equity to be able to borrow against your home.

For example: Let’s assume that you need to borrow £100,000 against a home that is worth £400,000. Now, you made a £50,000 down payment and borrowed £350,000. This means that you do not have enough equity on the home. As such, you cannot take a home loan secured by this property.

Will I have to pass a credit check to get vehicle finance?

You’ll have to pass a credit check to get vehicle finance. No lender wants to lend you money if you pose a risk of recovering the debt. Ensure that you have a good credit history before you apply for the loan. Also bear in mind that if you are unable to pay your debt, your lender will take the vehicle away from you.

Can I get a debt consolidation loan with bad credit?

You can get a debt consolidation if you have bad credit. Albeit, bad credit can impact your loan rate and cause it to go high. The reason is that creditors view you as a risk to their business. Some creditors are not willing to take on any bad credit at all. However, lenders are more considerate with rates if your bad credit is an aftermath of the current debt you want to consolidate.

How many debts can I consolidate?

There’s no limit to the number of debts you can consolidate. What matters is your ability to find a loan that can cover all the debt. Begin with calculating the total amount of debt you owe. If the amount exceeds £25,000, then consider taking a secured loan. Otherwise, an unsecured loan may be helpful.

Certain personal loans can be used to consolidate debt. Check with your intended lender and compare rates from different lenders to make the best decision.

What is a soft search credit check?

A soft search credit check is one that allows companies to carry a search on your credit history without putting a dent on the history file. Usually, a credit check on your file will leave information for other companies to see that you are trying to get a loan. If too many of these searches are seen on your file, lenders become hesitant to take you on. It means that you are desperate for a loan.

A soft search, albeit, allows different companies to check you out without it showing on your file. That way, you can compare rates from different lenders without coming across as a desperate person.