Understanding the Different Types of Loan Agreements Available to You

Loan agreement

If you're looking to borrow money, then it’s imperative that you’re aware of the different types of loans available to ensure that you borrow as cheaply as possible and that you can pay back the loan within a decent time frame.

There are so many loan options in the UK, that it can often be quite overwhelming when it comes to browsing through different loan types and choosing the best one for you and your circumstances.

We’ve put together a guide of the different types of personal loans available to you, as well as some insight into business loans and joint loans as well.

What is a loan?

In the simplest terms, a loan is a borrowed sum of money, usually from a bank or lender, that needs to be paid back within a given period of time, usually with interest added on top of the monthly repayments.

What types of loans can you get in the UK?

There are several types of loans that you can get in the UK and they’re often categorised into secured and unsecured loans.

Secured loans are a type of loan that are secured against an asset that you own such as your home, which you offer up as collateral. So, if you are unable to pay back the secured loan, the lender can seize your asset and sell it on to make up the money that you borrowed.

These types of loans usually come with lower interest rates, but they are also considered to be more high-risk as you’re not only borrowing money, but you also face the reality of your home being taken from you if you cannot make the repayments on your loan. 

Unsecured loans are more commonly used than secured loans and while the interest rates are often higher, there is often less risk involved for the borrower as you don’t have to offer anything up as collateral. Some types of unsecured loans include student loans, personal loans and credit cards. Let's take a look.

Personal loans

Personal loans are a type of unsecured loan, so they’re not secured against any asset that you own.

They’re a very common type of loan and they can help you pay for many different things, including medical bills, big purchases or even to consolidate your existing debt. As with every type of loan, there is always a certain level of risk involved, so you must be aware of all the terms and conditions of your personal loan before you commit to one.

Read more: 7 Important Things to Know Before Getting a Personal Loan

Business loans

A business loan is taken out with the intention of using it solely for business purposes, such as financing the setup of your own business, to pay for business expenses and equipment and anything else business-related that you might need funding for.

They are usually unsecured loans (although you can get some secured business loans that will be secured against your business assets) and they also come with added interest which you will have to pay on top of your monthly repayments of your loan.

Joint loans

Joint loans involve two or more people taking out a loan together, with both parties being equally responsible for paying back the loan.

It’s important to remember that you should only take out a joint loan with someone who has a similar credit score to you. Taking out a joint loan with someone who has a bad credit rating means that your credit file might be impacted as you will be seen to be associated with someone with bad credit.

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Payday loans

Payday loans are one of the most common types of short-term loans as they allow you to borrow money until you get paid, when you will then have to pay the money back.

While it’s not advisable that you use payday loans often, if you are struggling for money one month, they can be a way to tide you over until payday.

It’s important to bear in mind however, that the interest rates with payday loans can be incredibly high, so ensure that you’re aware of this before you commit to taking one out and be sure that you can pay the money back with the added interest before it gets too much.

Mortgage loan

A mortgage is a loan that’s taken out for the purchase of a property or land. It’s a type of secured loan as it is ‘secured’ against the value of your home until you’ve paid your mortgage off, which means if you miss the payments, your home could be repossessed and taken off you.

Read more: 6 Factors that Affect the Cost of Your Mortgage

Car loan

There are many types of car loans available including personal contract hire, personal contract purchase, hire purchase and numerous others.

Each loan differs slightly in what it offers you and the interest rates will differ depending on numerous factors, so always carry out extensive research of the different types of car loan available in order to see which option is best suited to you.

Find out What Checks are Done for Car Finance here.

What credit score do I need for a loan?

There isn’t one exact credit score that you need across all types of loans; each type of loan will usually require a different credit score and the credit score you need will also differ between each lender.

You may need a better credit score in order to take out a mortgage for example, than you need for a payday loan. It all depends on the loan provider and the circumstances in which you’re borrowing money.

What do I need for a loan?

The things you’ll need to apply for a loan will usually differ depending on what type of loan you’re applying for, but usually, you can expect to provide the following when applying for almost any kind of loan:

  • Personal details such as your name, date of birth, address and proof of three previous addresses.
  • Your bank details.
  • Employment details such as where you work, how long you’ve worked there for etc.
  • You will also need a good credit score (what classes as ‘good’ will differ with each lender).

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