If you’re thinking about taking out a loan, it’s important to make sure you’re getting the right one. Choosing the wrong loan could have seriously negative consequences for you and your financial health, and if you can’t pay it back, you could incur even more debt than you were in before the loan. With that in mind, doing research on the various kinds of loans and which situations they’re right for is imperative. Here’s our guide on some of the different kinds of loans, as well as which type of loan could be right for you.
Long-term vs short-term loans
As you might expect, loans fall broadly into two categories: long-term and short-term. Long-term loans usually grant much more money, but they need to be paid back over a longer period, so you’ll be in debt for an extended amount of time (unless, of course, you can pay back the loan in full). Longer-term loans include mortgages, student loans, and most credit cards.
Short-term loans are available more quickly, but they usually grant less cash and need to be paid back just as rapidly. Different kinds of short-term loans include payday loans, which are usually available at very short notice and need to be paid back within a few weeks or months, as well as merchant advances and some types of credit.
Unsecured vs secured loans
An unsecured loan is a loan against which you won’t have to put up any collateral. This means you won’t be borrowing against the value of your house or vehicle, for example. Usually, unsecured loans offer lower amounts, because lenders are more recalcitrant to lend if there’s nothing guaranteeing that you will make repayments. However, most lenders will offer unsecured loans if your credit score is good.
By contrast, secured loans are “secured” against the value of a material asset or possession. Often, such as in the case of mortgage or second mortgage loans, this asset is a property. Sometimes, it’s your vehicle, as in the case of car financing. Either way, if you fail to make repayments or honour the terms and conditions of these loans, you may lose the item against which the loan is secured.
Technically, credit cards are a kind of loan. The lender is giving you a card on which you can spend money that you don’t actually possess, on the understanding that you will make regular repayments on that card. Credit cards always come with an upper spending limit you can’t pass; this is your credit limit, and it will vary depending on the credit provider and your individual credit score.
Believe it or not, there are actually a number of good reasons to get a credit card. Doing so can help you to build your credit score, allowing you access to more loans in the future. There are even specific cards designated as “credit builder cards”, which are specially designed to help you do this. Knowing which kind of credit card you’re looking at will help immensely in the long run.
Small business loans
If you’re thinking of starting up a business, you’ll find that there are loans available specifically to suit your purposes. You can obtain small business loans from lots of different sources including private investors and even the UK government, so make sure you pursue this avenue of funding if you’ve got a killer business idea that you need to see come to fruition.
Bear in mind that if you do want to obtain a small business loan, you’re going to have to work for it. You’ll need to construct an airtight business plan so that any potential investors can see how you’re going to make your business successful. In addition, you’ll need to show them exactly how you plan to spend the money; just asking for investment without a plan will land you in hot water.
Home equity loans
Are you lucky enough to be a homeowner? If so, home equity loans could be for you. If you have a mortgage and you’ve paid a certain amount of it off, then home equity loans allow you to borrow up to that amount. Let’s say you bought a house for £200,000 and you own 50% of that house. In theory, you could therefore borrow upwards of £100,000 against the value of your home.
Of course, home equity loans are secured loans, which means you’d be borrowing with your house on the line. If you failed to make regular, prompt repayments on your home, you could face losing it, so this is only a good option if you know for certain that you’ll be able to make these repayments without issue. If you can’t make that promise, then it’s worth seeking out a different kind of loan.
Finally, we have student loans, which are available to those studying at university for the first time in various different guises. Undergraduates and those studying for a master’s degree can avail themselves of student loans, which usually have pretty low interest rates and a relaxed attitude towards repayment. In the UK, at least, student loans do not need to be repaid until you are earning above a certain threshold.
If you do have the money squirreled away, it is perhaps better not to rely on student loans to pay for your course; you could instead look to savings, simply because it’s usually better not to incur too much debt. However, student loans are an excellent option for anyone who wants to get into further education but doesn’t have the money reserves to pay for it themselves.