What Loan is Right for Me? A Guide to Different Loan Types
Shopping can be stressful, whether it’s for clothes, shoes or loans. The many options available can often make you wonder what the right choice for you is. Banks and financial institutions offer multiple loan options to suit your different financial needs. Lack of knowledge or clarity regarding your needs may result in a loan that negatively affects your credit score and makes it difficult for you to repay.
By understanding your finances and your options, you can decide what kind of debt you should take on and how best to invest and budget your money. This helps you avoid endangering your future by trying to meet your immediate needs.
In this article, we’ll discuss the different types of loans available and when to choose which one. Let’s get started.
Payday Loan
Payday loans are short-term, high-interest loans taken out for smaller amounts of money, usually less than £1000. Some of the best payday loans allow you to borrow as small an amount as £100. These stopgap loans are designed to help you pay for necessities or emergencies till your next paycheck arrives.
One thing you must consider when applying for payday loans is the sky-high interest rate. The FCA (Financial Conduct Authority) has capped the interest rate at 0.8% per day or 1250% APR.
This loan should only be taken when you have a dire financial need that can’t wait till your next payday. If you do not return the loan right away, you risk becoming trapped in a vicious cycle of bad loans where you have to keep borrowing money to pay back the previous amount.
Personal Loan
Personal loans are unsecured loans, they have no collateral attached to them. You can borrow a fixed amount for a set period, usually between 3 to 10 years. The interest rate is much less than payday loans, and you can make monthly payments towards paying off the loan, making it easier on your pocket.
Personal loans can be used for many different purposes, like paying for a wedding, home mortgage, renovations, or even travelling. The approval process for personal loans is much more stringent than for payday loans. Banks usually check your credit score and income source before lending you the amount. You can always return the loan before the tenure (don’t forget to check with your bank, as some lenders levy an early repayment charge), helping you improve your credit score.
Secured Loan
Secured loans, also known as home loans, allow you to borrow while keeping your home as collateral or ‘security’. If you fail to return the loan on time, the lender can sell off your home. The best part of secured loans is that you can borrow a higher amount that may go up to £100,000 or more.
Secured loans don’t require stringent credit checks, making it easier for people with no credit history to borrow. Make sure you don’t default on your mortgage payment, as you’ll not only incur more interest charges but may also end up losing your home. This type of loan is perfect for those who are buying a new home or property.
Debt Consolidation Loan
If you have multiple loans and piling debt, a debt consolidation loan can be the right solution for you. An alternative is a debt consolidation credit card. You can calculate the total outstanding loan amount and then apply for a loan of the same value. With the borrowed money, repay the outstanding debt. Now, you only need to pay one loan instead of multiple loans.
One thing that you must bear in mind before taking out a debt consolidation loan is that the total interest should be more than the interest you’ll be paying for the new loan. To get approval for this type of loan, a good credit score is needed. Additionally, you shouldn’t be on the verge of bankruptcy or declared insolvent.
Things to Consider Before Borrowing
Before applying for a loan, you must understand your financial situation and the loan terms. Here are some important points that can help you make an informed decision:
- Carefully calculate the total amount you need to borrow. Don’t make decisions based on a vague assumption.
- Compare the loan terms from different banks and providers to find the best rates; beware of hidden charges and terms.
- Be aware of your current expenses, income, and savings; this will help you understand your paying capacity.
In Summary
Loans can be extremely beneficial, but if not paid back on time they can turn into a nightmare. Assess your current and future financial standing before borrowing. Certain loans are absolutely necessary, especially if you are in a financial emergency. Being on top of your payment schedule can help you improve your credit score and allow you to live a debt-free life.
Proper financial planning, budgeting and having an emergency fund can help you lead a life of economic stability and security.
