What Type Of Loan Would Be Right For Me?

When you start looking for a loan it can be quite overwhelming and confusing – with so many different loans out there, and all the various words and phrases the finance companies use to explain them.

Even if you’ve had loans in the past, deciding which kind of loan would be best to go for can actually be really stressful.

Here we take a look at some of the main loan types you can opt for – from personal loans to remortgaging – to help you work out which might be the best option for you.

Personal loan

A personal loan is a type of unsecured loan, which means the debt isn’t secured against any asset, such as a house. With these loans you borrow a set amount, over a fixed period of time, and normally with a fixed amount of interest too. You then repay this over time, making the same repayment each month.

Positives – because personal loans aren’t secured against an asset, they’re available for you to apply for without being a homeowner, making them widely available to a large proportion of people. They often offer some flexibility on how long you want to pay the amount back over, e.g. sometimes from between 1 and 5 years.

Negatives – your credit rating is important when applying for a personal loan – a bad credit rating will mean higher interest rates, and could even mean being refused for credit altogether.

Payday loan

A payday loan is a form of unsecured loan. Amounts you can borrow tend to be low, generally between £100 and £1,000. You’ll usually pay it back along with the agreed interest within a few weeks or a month, basically when you’ve been paid. The big minus with this kind of loan is that interest rates tend to be very high.

Positivesthis kind of loan can seem like the easiest option for a short-term solution to a financial problem. Applying for one can sometimes be done without a credit check, so for people with bad credit, this can seem really appealing.

Negativesinterest rates can be higher than with most other loans – they can be around 300% when calculated as APR. Unless you have limited options available, you probably would choose to avoid the added expense of interest rates and fees – and some feel that these loans actually encourage a cycle of debt.

Remortgaging

Remortgaging involves switching from your current mortgage to another product. It doesn’t involve moving house, it just means replacing the financial agreement that you have on your property with another.

Although a lot of people tend to remortgage just to find themselves a more appealing mortgage deal with lower repayments each month, others may also choose to remortgage as a way of raising a lump sum of money that they can use as they would a personal loan, for example to make some home improvements that’ll increase the property value.

Positives – remortgaging can sometimes be seen as a cheap way to raise money, as the amount you add is divided onto your monthly repayments which are typically spread over many years – so borrowing say £2,000 might only cost you an extra £10 or so more a month, depending on your interest rate and how long you’ll be paying your mortgage off over.

Negatives – like a secured loan, your mortgage is secured against your property, so if your monthly payments are going up significantly, make sure you’ll be able to pay them each month, otherwise you could be in danger of getting your house repossessed.

You should also find out if you’re going to be charged fees for remortgaging. You might have to pay for a revaluation of your property and there could be conveyancing costs too. Your existing lender might also charge a fee if you repay your mortgage early – called an ‘early redemption fee’.

Secured loan

Sometimes called “home-owner loans”, you’re able to get a secured loan if you’ve got an asset that a loan can be secured against – this is usually a house. So, if you’re a home-owner you’ve got a much better chance of getting a secured loan.

Positives – the best thing about this kind of loan, is that because lenders have the security of your asset, they might be able to give you a better repayment rate. What’s more, if you have found it tricky to get a loan in the past due to bad credit, it might be a good option.

Negatives – the loan is secured on your home, so you could be at risk of getting it repossessed if you don’t keep up your repayments. Some loans have variable interest rates, meaning your repayments could increase or go down from month to month, so you can’t always be sure the precise figure of what you’ll be paying each month. Before agreeing on a loan, make sure you know if it’s a fixed or variable rate.

Guarantor loan

For a guarantor loan, you’ll need to find another person who’s prepared to say they’ll make your repayments if you fail to pay them. It’s better if your guarantor has a really good credit score, so ideally with no CCJs or IVAs in the last six years, and it’s helpful if they’ve got at least one large asset, e.g. if they’re a homeowner.

Positives – this can give you a really good chance at a loan that would be otherwise not an option for you. They tend to have lower interest rates than other loans designed for people with bad credit.

Negatives –  asking someone to be your guarantor can be a sensitive question, as they’ll be responsible for making the payments if you don’t. So, it’ll need to be someone who trusts you, and knows you won’t let them or the lender down.

Bad Credit loan

As the name suggests, these loans are specifically designed with people with bad credit in mind. They typically have higher interest rates, and can have added restrictions or other terms attached to them, depending on the lender.

Positives – the main plus is that you’re much more likely to be approved for this kind of loan, as they’re specifically for people with a less than spotless credit file. If you get a loan and stick to the monthly payments, you could actually help to improve your credit score by doing so – more so than not getting a loan at all.

Negatives  – because you’ve got a bad credit rating, you’re viewed as a higher risk to lenders. This means that interest rates can be much higher on a bad credit loan, and other conditions and fees might be applied too.

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