Best Loans Articles

Many different people in the UK need to borrow money through loans for a variety of different purposes. Whether it is for the purchase of a luxury item, or to buy a house or make home improvements, or simply to consolidate other existing and more expensive loans and card debts, for someone who may not be particularly familiar with the different loan options on offer, choosing the best loan to meet their circumstances can be a daunting prospect.

A certain type of loan could be more likely to be suitable for a specific purpose than a different loan may be and therefore this article is intended to give a little bit more insight into which type of loan may be suitable for various borrowing needs.

There are many different types of personal loan available to choose from, from small pay day loans and personal loans supplied by doorstep lenders and pawn brokers, all the way through unsecured loans to secured loans and mortgages, or home owner loans.

We will look at the various types of loans, starting with the smallest first and building generally upwards.

Some of the smallest loans available are payday loans. These are intended as a short term loan of usually less than one month and are designed to provide a small cash amount to see someone through until their next pay day, when the loan will be repaid in full.

Although these loans can be extremely useful for those people who have difficulty managing their money to the end of the month, they are usually an extremely expensive form of borrowing, often charging interest in the hundreds of percent APR (Annual Percentage Rate). In many cases, someone who is looking at such an option may be better off asking their bank for an overdraft facility.

Many people who do not have access to a personal loan through the more traditional route of a high street bank, for example, often use doorstep lenders to access a loan. Once again, these loans are usually for small amounts of just a few hundred pounds or so and may be collected weekly or monthly by the loan company on a door to door basis.

Doorstep loans are usually available to those people with a poor credit rating, who would probably be turned down for a loan from a bank. Once again, these are very expensive types of loan and although the sums borrowed are relatively small, the interest can soon add up, leaving people in a difficult financial position.

The next step on the ladder would be unsecured loans through a traditional high street bank or other loan company. Unsecured loans are usually available for relatively small sums of money starting from around £1,000 and going up to a maximum of £25,000, although some lenders will only allow smaller loans than this amount.

The term of an unsecured loan can also vary, from one or two years, usually up to a maximum of around ten years, although once again these vary between different lenders. These loans are generally much cheaper than those mentioned previously, but can vary greatly in cost, depending of the amount and term of the loan.

The smaller the amount of money being borrowed, usually leads to a higher rate of interest being charged on an unsecured loan. For larger loan amounts, the interest rate usually drops and it can sometimes be beneficial to borrow a larger sum than was originally intended, although borrowers should be careful not to borrow too much simply for the sake of a cheaper loan rate.

Unsecured loans are probably one of the most popular types of loan and can be used for almost any purpose, from things like buying a car, paying for a holiday or other luxury item, or simply as a debt consolidation loan to clear other existing and more expensive loans and credit cards.

Longer term loans will lead to lower monthly repayment amounts and whilst this may help to ease the monthly budget, interest will be paid on the loan for a longer period of time and therefore the overall cost of the loan could end up being significantly higher than one over a shorter term.

For larger loan amounts over a longer period of time, a secured loan is the most suitable option. Secured loans are only available to home owners, as the loan takes a legal charge on the borrower’s property as security for the loan. If the borrower should default on a secured loan, the lender has the right to reclaim their losses from the value of the property held as security, which can often mean repossession of a person’s home, although this should only be adopted as a last resort by the lender.

Secured loans usually start at around £10,000 and go upwards, with the upper limit of the loan usually dependant on the affordability for the borrower and the value of the asset being used as security for the loan.

Because a secured loan offers some form of security for the lender, this reduces the risk of them not getting their money back and as a result of this, interest rates on a secured loan are usually significantly cheaper than an unsecured loan, although there could be additional costs such as valuation and legal fees to be considered.

Secured loans are used for many purposes which require larger sums of money, such as home improvements or large levels of debt consolidation. They are probably not really suitable for things like a car loan or holiday loan, which would need to be repaid over a shorter period of time.

The term of a secured loan usually starts at around five years and can go up to 25 or even 30 years, depending on the personal circumstances of the borrower.

Usually, the largest loan anyone will ever take out is a mortgage or home owner loan. These are simply another type of secured loan which are designed specifically for house purchase. Mortgages normally have some of the cheapest loan interest rates of any type of loan, although the cost of a mortgage can be very great indeed, as they are usually for large amounts of borrowing over a long term, often 20 or 25 years.

Mortgages are currently the only type of loan which are regulated by the Financial Services Authority (FSA) and as such offer borrowers a much higher level of protection than many other types of loan.

The above is a very brief outline of the different types of loan which are available on the market at the moment and although it is intended to give an overview of what is available to borrowers, it is not definitive and there are many variations.

Taking out any kind of loan is a large commitment and a potential borrower should think very carefully before rushing into the first loan which is offered to them. If there is any doubt as to which is the best way to borrow money, a person should take professional advice from a financial adviser or loan broker, who will be able to guide them through the various options and find the most suitable loan to meet their needs.