9 Types of Loans – Helping You to Understand How They Work

Are you wondering whether taking out a loan is the right thing to do? Well, before you start applying it is best to consider what types of loans are available so that you can make an informed decision concerning your financial situation. 

There are many types of loans to suit people’s different circumstances. For instance, whilst student loans are commonly heard of, there are also types of loans that can help you pay off existing debt.

 Hopefully, this blog should help you to decide the option that best suits you.

How Do Loans Work?

Each type of loan works differently. Mostly, a loan is a fixed amount of money that a lender offers to you, and the amount that you borrow will have to be paid back in full, usually with interest, over an agreed period.

However, not all loans have interest rates. Additionally, some have variable rates, so the amount that you pay back each month can vary. On the other hand, a personal asset could be used as collateral, if you fail to pay back what you borrowed.

The different categories of loans are as follows:

Secured Loan 

So, what is a secured loan? 

A secured loan is a type of loan where a personal asset, such as a house, is used as security for the lender. In simpler terms, if you fail to pay back what you have borrowed, then the lender can repossess the asset. 

Generally, it is a property that will be used as collateral, but other valuable items can be used as well, such as a car.

 Unsecured Loan 

Now, what is an unsecured loan?

An unsecured loan is a type of loan where the lender does not require collateral. However, because the lender does not have any security in this instance, they will usually have higher interest rates.

Additionally, to receive an unsecured loan, the borrower would usually need to have a good credit history.

Instalment Loan 

An instalment loan is a type of loan where the borrower repays the lender the full amount of what they owe by instalments over a set period. Typically, the borrower would also have to pay interest. 

Before the loan is approved, usually an amount will be agreed on of what the borrower will have to pay each month as well as the date that it will have to be paid. 

Revolving Credit 

Revolving credit is a type of loan that is flexible. The borrower can make repayments but then withdraw again as long as it is within their pre-approved credit limit. This type of loan tends to be reviewed every 24/36 months to ensure it still suits the borrower’s needs.

The borrower would usually have to pay interest and, with regards to what they have borrowed, there is typically a minimum amount they would have to repay each month.

What Are the Specific Types of Loans?

1) Personal Loan 

Lending taken out by an individual, and not a business would be considered a personal loan.

They can be used for a range of purposes such as home improvements, buying a vehicle or for consolidating multiple, high-interest debts. Often their flexibility and short-term repayment plans can be convenient if you have an unexpected expenditure, such as a high bill. 

Additionally, some people may take out a personal loan to help them with a new business venture.

Personal loans can be secured, but typically they are unsecured, meaning the lender will not require any collateral.

The borrower will usually have to pay interest on a personal loan, either at a fixed rate or variable; the rates you will be offered will depend on your credit history and current financial situation.

Find out how to improve your credit score to get a better interest rate.

2) Hire Purchase 

A Hire Purchase (HP) Agreement is a credit agreement where you hire an item (for example, a car or other high-value item) and pay an agreed amount in monthly payments. You do not own the item until you have made the final payment.

Because the lender has more security with this type of loan (they can seize the car or item if you fail to make your repayments) these lending agreements can often be available to those with a poorer credit history. Rates tend to be lower, the better the credit score that you have. 

The borrower will pay off the loan in fixed monthly instalments. Usually, the loan amount and the interest rate that the borrower will have to pay will depend on the price of the car, the value of the deposit that can be put down and the credit rating of the borrower.

As the Lender has security in the form of the vehicle it can be at risk of repossession if payments are not maintained.

3) Student Loan 

A student loan is a sum of money that a student borrows to help them pay for their higher education, such as for a course at a college or university. They can also help to cover living expenses if a student isn’t earning enough or if they are unemployed. 

A student loan is available from both the government and private lenders and the borrower, and, typically, the borrower doesn’t have to start repaying it until they are earning a certain amount of money.

The interest rate will vary depending on the type of student loan.

4) Mortgage 

Mortgage loans help a borrower buy a property, typically a house.

A mortgage is a secured loan, meaning that the lender will use your property as collateral (they can seize your property if you fail to make payments).

There will also be an interest rate to pay, which will depend on the credit history and current financial situation of the borrower. Additionally, the deposit amount that the borrower is able to put down will also be an important factor. 

The mortgage loan is repaid by the borrower via monthly instalments over an agreed period.

Some people decide to remortgage to clear the debt that they have accrued. 

5) Debt Consolidation Loan 

A debt consolidation loan is a way for borrowers to repay multiple debts, paying them all off with one bigger loan. This type of loan can be used to pay off multiple types of credit including credit card debt, overdrafts, and personal loans.

Since this allows all of the borrower’s debt to be in one place the interest rate may be lower which could help them to reduce their monthly payments. 

Additionally, a single monthly payment can be easier for a borrower to manage, rather than being responsible for making payments to multiple creditors.

6) Payday Loan 

A payday loan is a short-term loan, usually available on the internet or from high-street shops. 

This type of loan, typically, comes with a high-interest rate and it has to be paid back within a month. If you take out a payday loan, then you will usually have to agree that your lender can take the money that you owe from your bank account.

7) Doorstep Loan 

A doorstep loan (also referred to as home credit) is a type of loan that can help you with an emergency or any short-term costs. 

It is known as a doorstep loan because the lender visits the borrower’s home to give the loan in cash, then returns at a later date to collect the repayments. However, these days there is usually an option to receive the loan and make repayments online.

The amount you can borrow in a doorstep loan is usually up to £1000. They come with high-interest rates since they are typically easy to apply for even if the borrower has a bad credit history.

Find out how to deal with debt collectors at your door.

8) Logbook Loan 

A logbook loan is a secured loan since the lender will use the borrower’s existing car as collateral. 

This is a more expensive type of loan as interest rates are usually very high.

You can normally borrow between £500 – £50,000 depending on the vehicle value and repayments must be made within 78 weeks of you taking out the loan.

Find out more information if you need help with logbook debt.

9) Loan Shark 

A loan shark is a type of lender that is not authorised by the Financial Conduct Authority (FCA). 

This is an illegal type of lender. They charge very high fees and there is hardly any paperwork involved.

If the borrower fails to repay what they owe, then a loan shark will generally use illegal means to try and get the money. 

If you have taken out a loan with a loan shark and they threaten you, then contact the police immediately. You can report a loan shark on the following Government website https://www.gov.uk/report-loan-shark

Find out more about loan shark debt.

Now that you’ve read some information about the different types of loans available, hopefully, you will be able to make an informed decision on the right option for you. However, Swift Debt Help can offer advice regarding other debt solutions, such as an Individual Voluntary Arrangement (IVA).