The world of credit has a dizzying array of options, and it’s often hard to differentiate between them. Your situation is likely to be unique, which is why understanding what options are available and how they differ is important for you to get the best option for your position.
Read on to find out exactly what types of loans are available to you, and what other options you might have.
The difference between secured and unsecured loans
Unsecured Personal Loans
An unsecured personal loan is the most common type of loan available, with the term unsecured meaning that it’s not backed against anything specific, you simply owe the lender the money, plus interest.
Because they aren’t secured against collateral, these types of loans are higher risk for lenders, which means that they tend to have slightly higher interest rates than secured loans.
The rates you’ll get, and whether you can get a loan of this type, are generally based around your credit score. Expect a huge variance, with rates anywhere from 4% to 40%, across terms from 1 to 5 years as standard.
Secured Personal Loans
A secured personal loan is similar to an unsecured, except the loan is backed by an asset, which can be taken from you if you do not make your payments.
Common examples of loans of this type are mortgages and car payments. If you fail to keep up on your car payments, for example, the contract allows the lender to seize the car in lieu of the money.
Some banks and other lenders offer secured loans as a service, for example, remortgaging a house. Expect lower rates, but understand that you’re putting your collateral on the line when you take a loan of this type.
Loan types, interest, consolidation and other options
Fixed Rate Loans
The majority of loans are fixed rate, which means that the rate of interest for repayments is fixed the moment you take out the loan.
These loans tend to be easier to work with, because the payments are consistent, allowing you to budget for them in advance, and not have to worry about payments shifting.
Variable rate loans aren’t fixed, which means your monthly payment can shift and fluctuate wildly, depending on how the general interest rates change. That’s because loans of this type are linked to an outside source, for example, in the UK, loans follow the base rate of interest, which is set by the Bank of England.
If interest rates rise, it means that your payments will also rise. However, loans of this type usually have a much lower APR than fixed rate loans, which means if you believe you will be able to pay your loan back quickly, or you are looking at a short term loan, a variable rate may be more suitable.
Debt Consolidation Loans
As the name suggests, a loan of this type takes several existing debts, and combines them into a single loan.
Debt consolidation loans normally have a lower APR than your existing loans, to aid in repayment, and brings all your payments into one value, which makes budgeting simpler. However, they aren’t available to everyone.
A co-signed loan is a loan for people who might otherwise struggle to find a line of credit on their own, whether because of a bad credit score or a lack of reasonable expectations for funds.
With a co-signed loan, someone else agrees to take on the risk of the debt with you. If you are unable to make the repayments, your co-signer is legally obligated to pay as well as you.
A co-signer who has a good credit rating can also improve your chances of getting a loan, as both of your payment histories will be taken into account by the lender when considering the loan application.
What else is available
Often, the traditional means of getting a loan simply aren’t feasible for a lot of people. But don’t worry just yet, as there are multiple other options available. The best options are detailed below.
Personal Line of Credit
Similar to a credit card, just without the card, a personal line of credit gives you access to a lump sum value that you can borrow from as necessary, but you only repay from what you’ve borrowed.
Lines of credit of this nature are a better choice for people or businesses who need a ready access to funds on an as needed basis, rather than a lump sum.
Credit Card Advance
Some credit cards give you the option of a cash advance, taken from your bank or an ATM. It’s a simple way to get short term funds, but can be expensive, for multiple reasons.
Firstly, there’s likely to be a cash advance flat fee, so you already pay before you borrow anything, and second the interest rates are likely to be higher than other, similar options.
This option is suitable if you’re looking for fast cash that you know you can quickly repay.
A pawnshop loan is identical to a secured personal loan, but made to a pawnshop and generally based around smaller loan values, and smaller pieces of collateral, such as electronics or jewellery.
If you do not make repayments in time, the pawn shop then legally owns the property used to secure the loan, but there are reasons why a pawnshop loan can be preferable. The rates are high, but lower than some other short term options, and as it’s a cash transaction it generally will not affect your credit score.
Payday loans are loans with a very short repayment time, and a high interest rate. In general, you’re expected to repay the loan amount, which is generally only of a few hundred dollars, by your next pay day, hence the name.
However, payday loans do have some advantages. They’re generally available at very short notice, with a decision and cash in minutes the majority of the time, and loans of this nature might be available to people who might not be able to get traditional lines of credit.
Normally, you only need a source of income, i.e. a job, in order to get a payday loan, and there are specific payday loans available for people who might have a bad credit score.