The personal finance industry’s expansion has greatly benefited consumers. There’s now a wide array of financial products to choose from, and the internet makes research easier. However, navigating the personal loan market can still be tricky. This article explains various personal loan options and types to simplify your decision-making process.
We’ll cover everything from online payday and installment loans to unsecured, longer-term personal and bank loans, helping you determine the best fit for your needs. Here’s a concise guide to understanding your options and making the right choice from the start.
What are the main types of personal loans?
Several personal loan types exist, but first, you must decide between a secured or unsecured loan. Let’s explore the difference.
Secured loans: Understanding Personal Loan Options & Types Explained
Like mortgages, secure loans require an asset as collateral for the lender. If repayments lapse, the lender can seize and sell the asset to recover the loan amount. These loans typically have lower interest rates, higher loan values, and longer repayment periods. However, they pose significant risk to borrowers, who could lose their homes during financial hardship.
Remember that secured loans often come with lower interest rates due to lower risk for lenders. However, thoroughly understand the requirements for a personal guarantee associated with a secured business loan.
For ease of calculation, try a free online loan calculator to estimate monthly payments, interest rates (%), and installment amounts. Consider a compound loan calculator that factors in different compounding frequencies (weekly, biweekly, monthly, yearly, and quarterly) to estimate the principal amount. Here are some crucial points to remember about secured loans:
- Collateral, such as physical assets like vehicles and property or even liquid assets like cash, specifically secures secured loans.
- Both personal and business loans can be secured.
- Banks, credit unions, and online lenders offer secured personal and business loans to eligible borrowers.
- Interest rates, loan terms, and fees for secured loans can vary significantly depending on the lender.
After securing a loan, utilize a simple loan repayment calculator for a complete repayment amortization schedule, including the interest payable during repayment.
Unsecured loans
These loans don’t require collateral like property. Instead, lenders determine loan eligibility by assessing credit records and affordability. Compared to secured loans, they usually have lower loan values, shorter terms, and higher interest rates. However, borrowers won’t face home loss in case of default.
We’ll focus on unsecured loans as they constitute most personal loans available to consumers. Here’s a breakdown of the primary types:
Payday loans: Understanding Personal Loan Options & Types Explained
These are small, short-term loans intended to cover expenses for a few weeks to a couple of months. Traditionally repaid on payday, hence the name, the market has expanded to offer more flexible options like installment loans.
Installment loans are still quick and easy to apply for online, but they allow repayment over several months, making them more manageable and less likely to lead to further financial problems. However, these short-term loans still carry high interest rates and potential extra charges, particularly for late payments. Always review the terms and conditions carefully before committing.
Why might you need a short-term loan?
Short-term loans, such as payday and installment loans, can be helpful during financial emergencies. Unexpected expenses, like car repairs, a broken boiler, emergency dental work, or school trips, can arise and strain your finances. A quick loan can provide temporary relief in such situations. Understanding these personal loan options is crucial.
However, if you frequently rely on loans to cover everyday expenses, it’s essential to reassess your spending habits, identify potential savings, or explore ways to increase your income, as continuous borrowing is unsustainable.
Longer-term online loans
Online banks and lenders offer longer-term personal loans, ranging from £1,000 to £20,000, with repayment terms between 1 to 10 years. Loan amount and repayment period heavily depend on your credit score, income stability, and employment status.
Interest rates on longer-term loans are generally lower than short-term options like payday loans. However, compare providers by their Annual Percentage Rate (APR), clearly displayed on their websites, which represents the total annual loan cost, including charges and fees, as a percentage of the borrowed amount.
Traditional bank loan: Understanding Personal Loan Options
You can still approach your bank for a personal loan if you prefer a traditional approach. Banks now offer competitive personal loan deals, adapting to online competition by becoming more flexible and responsive to interest rate changes in the Open Banking era and against challenger banks.
High-street banks assess loan repayment capacity similarly to online lenders but may be more risk-averse. If you have a less-than-perfect credit history, a high-street bank might not offer the most favorable personal loan terms.