Which loan should you get?
There are many financial products available so it could be confusing to determine which product is best for you, and why. Most loans have no restrictions on use – they can be used to pay for anything the borrower sees fit.
The two broad loan categories are secured and unsecured loans. This guide will try to explain the different types of loans, where to find loans, and how to apply:
Bad credit history loans
Most people could qualify for loans, even they who may have had financial difficulty in the past. But the interest rate and other fees would be higher than for someone with a clean credit report. People with an adverse credit history may find it easier to qualify for a secured loan instead of a personal loan.
Personal loans
Borrowers use these types of loans for a personal reason; they generally do not use it to start a business or to buy a property.
Borrowers could use personal loans to pay for a holiday, do a short course or buy a computer. There are specialist loans available for when you need money for tertiary education, to buy property, or to buy a car.
Commercial loans
Borrowers could use commercial loans to finance:
- Sectional title office blocks
- Sectional title mini factories
- Income-producing commercial buildings
- Blocks of flats
- Asset finance
- Bridging finance
- Banks and specialist brokers generally make commercial loans available to borrowers for up to 15 years.
- Longer term and larger loans
Most lenders may be reluctant to lend large amounts, or to finance loans that have long repayment plans.
There are specialist lenders who will be willing to offer such loans. Shop around to find one that suits you but be sure that the interest rate is reasonable.
Car loans
Banks, brokers, and car dealers offer specialist car finance packages that are preferable to using personal loans. While unsecured car loans are available to borrowers, secured loans may be a better choice.
Car leases and hire purchase plans are two other types of car loans. However, the car belongs to the dealer until the borrower has repaid everything in full.
Bridging loan
The majority of bridging loans are to cover that period between purchasing properties. Such loans are only available for a short period, and attract a high interest rate. The good news, however, is that approval could take as little as 24 hours.
Student loan
The Student Loan Company, a non-departmental public body of the United Kingdom government, help students with their tuition fees, maintenance loans, grants for living costs, as well as bursaries and scholarships.
These loans have reasonable interest rates and need only be repaid once the student finds a job that pays over a certain amount, currently £15,000 per annum.
Where to get a loan
There are a number of lending firms which can offer you money or credit; however, you should only deal with those firms who are licensed lenders. The Office of Fair Trading can tell you which firms these are.
Avoid loan sharks – they are not licensed and charge high interest rates. They could also threaten you with violence if you struggle to repay the money.
Find a reputable bank, building society or credit broker instead. You can find details in the phone book, or you can go online. Do not take the first offer you get; shop around first.
A credit union is another good place to get a loan. These cooperative financial institutions offer secured and unsecured loans to its members only.
Moneylines, a community development finance institution, lends and invests in areas that are not served by mainstream banks. They provide money for anything from personal loans and home improvement finance to working capital and bridging loans.
Personal loans
Someone with no assets or other collateral could get a personal (unsecured) loan. Such loans do not take long to approve and there is no risk that you’ll lose your property should you struggle to make the repayments.
Advantages of personal loans
- Fast approval
- Do not need security
- Help to establish a good credit history
- There are no restrictions on how the money should be used
Disadvantages of personal loans
- Higher interest rates in comparison to secured loans – This is generally because there is a higher risk to the lender.
- Restrictions on how much you can borrow
- Potential penalties for paying off the loan early
- Failing to make payments can affect your credit record
- Short repayment terms
- Lenders tie interest rates to credit profiles; high credit scores receive better interest rates
How to apply for a personal loan
Besides verifying your identity, most financial institutions want your address details, bank or building society details, yearly income and expenses, and your employer’s details. The criteria when applying got a personal loan include:
- You should be over 18
- You should be in paid employment
- You should not be in full-time education
- You should have a bank or a building society account
- You should have a permanent UK address
- You should not have been declined for credit in the last month
- You should not have a history of bad credit such as arrears, county court judgments (CCJs), default or bankruptcy
Secured loans
Secured Loans are only available to those who have valuable assets which can be used as security against the loan amount, such as property.
Such loans have few risks to the lender but the risk to the borrower is great. The lender can begin the repossession process if the borrower fails to make regular payments to this loan.
Advantages of secured loans:
- Lower interest rates
- Longer repayment periods
- They who have bad credit records can still apply
Disadvantages of secured loans:
- Lenders want assets as security
- Defaulting could mean you lose the asset to which the loan is tied
The annual percentage rate
The annual percentage rate (APR) helps you to compare lending products easily. This shows you the loan’s true cost: it includes interest payments as well as other fees.
Your credit risk determines the interest rate the lender gives you. Those who pose a minimal risk to lenders get the best interest rates, whereas those who pose a greater risk get higher interest rates.
Loans are either fixed or variable rate. Fixed interest rates mean you’ll know exactly how much you’ll pay each month and interest rate hikes do not affect you; however, the reverse also applies: your interest rate does not decrease when the government lowers rates.
Repayment options
Your lender decides how you will repay the loan, and different products may have different terms. Your credit history could also impact the repayment term.