Different types of loans and what they mean for you

If you’re thinking about taking out a loan, it’s easy to feel intimidated by the sheer range and depth of options on offer. Every loan feels like it’s offering different terms and conditions, and they all seem like they might be the right option, but you just can’t be sure. It’s important to get this decision right, so you don’t want to dive in headfirst, but you need to be certain. We understand that, and we’re here to help you. Here are just some of the different types of loans you can take out, and what they mean for you, as well as whether they might be the right option for you or not.

Unsecured personal loan

This is the simplest and most straightforward type of loan. If you take out an unsecured personal loan, you’re essentially just borrowing money from a lender without anything against which to secure the money. Unsecured personal loans are judged against your credit score, so if you don’t have a good standing with credit companies, you’re less likely to be approved for this type of loan.

Is it right for you?

An unsecured personal loan is right for you if you’ve got a great credit score and don’t want your loan to be secured against something you own. It’s as close as you’re going to get to a “no strings attached” loan, so if that’s important to you, this is the type of loan you should pursue.

Secured loan

In opposition to an unsecured personal loan, a secured loan is, well, “secured” against something you own. This might be your home (as in the case of a second mortgage loan, in which you’ll take out another mortgage against your property), your vehicle, or any other asset you own. It’s likely to be something significant in terms of value, so if you don’t have anything like that, you won’t be approved for this kind of loan.

Is it right for you?

A second mortgage loan can be a great option if you’re looking to carry out DIY or renovation work on your home, or if you need money for a holiday. This isn’t a good option, however, if you’re not a homeowner and you don’t have any collateral property against which the loan can be secured.

Credit cards

Contrary to what many may say, a credit card is, in essence, a type of loan. The lender gives you the card, and you can spend up to your limit on it if you wish, but you’re going to have to make those repayments just like you would with any other loan. The difference is that credit cards don’t deposit the entire amount in your account at once; they provide the balance of the loan to you as a payment card.

Is it right for you?

Credit cards should come with massive caveats. They’re great for pulling you out of a short-term hole, but they won’t help you with long-term financial trouble because you will need to make repayments on them. However, if you need help quickly – say, for holidays or occasions – credit cards can be good.

Business loans

If you’re looking for a business loan, you probably already know whether getting one is the right option for you or not. A business loan can help a startup to begin operations, and although you will need to pay that money back, you’ll likely have a solid plan in place to help you do so. It should go without saying, but business loans are not widely available to the general public.

Is it right for you?

Are you starting a business? If so, you should consider pursuing a business loan. These loans are much better for companies than investing your own money, but lenders can often be skittish if your idea isn’t proven to work and doesn’t come with a complete business plan from the off.

Peer-to-peer loans

Unlike traditional loans, which connect companies with those looking to borrow, peer-to-peer lending simply involves two individuals. There are advantages and disadvantages to this kind of lending; you might find someone who’s more willing to entertain your situation if it’s unique or unusual, but peer-to-peer lenders are often less eager to help those in serious debt.

Is it right for you?

Peer-to-peer lending is good if you’ve been unable to obtain a loan through conventional means. It can also be cheaper than traditional loans, and it’s sometimes easier to negotiate repayments if you fall on hard times. However, be aware that peer-to-peer lenders still perform credit checks, so this isn’t a catch-all solution if you’re struggling.

Payday loans

They’ve received a lot of negative press, but the fact is that many people still rely on payday loans to help them get through a month, so you should at least know what you’re getting into. Payday loans are ultra-short term loans that grant you quick cash in exchange for a fee rather than an interest rate. They’re usually very quick, but the fees you’ll pay are pretty exorbitant when compared to average interest rates.

Is it right for you?

Usually, no. Payday loans really shouldn’t be considered unless you’ve fallen on seriously hard times. If you do take out a payday loan, just make sure that you can pay it back quickly and without hassle, because it’s very easy to spiral into debt if you miss even one repayment.

We hope this guide on some of the different kinds of loans you’ll find out there has been helpful. Whichever kind of loan you apply for, just remember to maintain regular repayments and don’t let the debt get on top of you.

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