Different types of loans

Loans jargon buster

Some of the language used can often sound alien, so we’ve put together a quick list of them and their meanings.

• Repayments: These are the payments you make, typically on a monthly basis, to pay back the loan. They include part of the amount borrowed and interest.

• Interest: This is the additional cost the lender adds to the loan for letting you borrow money from them. It is shown as a percentage rate.

• Collateral: If you apply for a secured loan, collateral is the property you provide the lender as security. In most cases, this would be your home.

• Term: This is the time frame you agree to pay the loan back over, and is usually expressed in years.

• Joint loans: Some loans will allow you to take them out jointly, meaning you can apply with someone else. Both applicants would be equally responsible for the repayments.

Personal Loans

Personal loans (also known as unsecured loans) are flexible and can be used for almost anything, from consolidating debt, funding a holiday or covering unexpected expenses. They don’t require collateral, so lenders usually pay more attention to how you’ve used credit in the past when assessing your eligibility. These can be taken out solely, or with someone else as a joint loan.

Pros	Cons
Flexibility: Can be used for various purposes.	Higher interest rates: Unsecured loans can often come with higher interest rates.
No collateral needed: These loans aren't secured, so no assets are at risk.	Credit score impact: Your credit score can affect your approval and the interest rate you’re offered.
Quick turnaround: Some providers offer same day funds.	Lower loan amounts: Personal loans usually range between £1,000 to £15,000.

Secured loans

Secured loans typically allow you to borrow a larger amount because you offer an asset as security - usually your home (with a homeowner loan).

They can be used for a range of purposes, including debt consolidation, home improvements, and other large purchases. These can also be taken out solely, or with someone else as a joint loan. 

Due to the security provided, there is less risk to the lender, meaning you may be able to borrow larger amounts, at lower rates, over longer periods. However, if you don't keep up with repayments, the lender could take possession of your asset.

Pros	Cons
Higher loan amounts: Secured loans typically range between £10,000 and £500,000.	You need to provide collateral: Lenders require property to be used as security.
Lower interest rates: Rates are usually lower than unsecured loans because of the security you provide to the lender.	Risk of losing your property: Your home or car could be repossessed if you fail to keep up with repayments.
Longer terms: Loans can run for up to 30 years, making monthly payments smaller. However, the longer the term, the more interest you’ll pay overall.	Longer application process: Can take around three to four weeks due to the information required.

 

Debt consolidation loans

Debt consolidation loans help you combine multiple debts into one payment, making it easier to manage and potentially lowering your overall interest rate. These can be secured or unsecured, depending on your needs, and are able to be in joint names.

Pros	Cons
Simplified payments: Easier to manage one payment.	Extended repayment: May extend the repayment period and therefore possibly increase the total amount repaid.
Potentially lower rates: Can reduce overall interest rates paid on your debts.	Risk of more debt: Can lead to more debt if not managed properly.

 

Mortgages

Mortgages are large loans used to buy homes.

In most cases, they require a deposit, which is used alongside the mortgage to purchase your property. The larger your deposit, the more likely you are to be accepted with better (lower) interest rates.

They vary in length but can run for up to 40 years depending on your individual circumstances. Mortgages are available with fixed rates (same payment every month) or variable rates (payment could change over time), and can be in both sole or joint names.

Pros	Cons
Become a homeowner: Mortgages can get you onto the property ladder.	High upfront costs: Deposits, conveyancing costs, and other fees can mount up.
Build equity: As you pay off the loan, you build equity in your home.	Risk of repossession: Missed payments can mean losing your home.

Car finance loans

Car finance loans are specifically for purchasing vehicles. There are different types of car finance loans available, and they are often secured by the car itself. Some will allow you to take them out in joint names.

Pros	Cons
Lower interest rates: Can be lower than unsecured loans because the car serves as collateral.	Risk of repossession: If you can't make payments, the lender can repossess the car.
Fixed terms: Predictable monthly payments.	Depreciation: Most cars lose value over time, which can affect the loan-to-value ratio.

 

Credit-building loans

Credit-building loans can be a useful way for people with limited or no credit history to establish credit. They are often for small amounts and designed to help build a positive credit profile.

The lender holds the loan amount in an account, which you make monthly payments to. Once the loan is paid off, you are given access to the funds. These loans sometimes come with subscription fees.

Pros	Cons
Build your credit score: Can help you build a credit history to improve your chances of accessing credit in the future.	Delayed access to funds: You’re unable to access the funds until you have paid off the loan.
Easier acceptance: Eligibility is less credit focused given the loan’s nature.	Subscription fees: Some lenders will charge subscription fees in order to take out a credit-building loan.

 

Student loans

Student loans help cover the cost of education, including tuition, fees, and living expenses. There are provided by the government through the Student Loans Company.

Pros	Cons
Lower interest rates: Student loans often have low rates, although these depend on when you started your course.	Debt burden: Can accumulate significant debt over time.
Deferred payments: Payments only begin once you are earning above a certain salary threshold. This threshold also depends on when you began studying.	Limited use: Funds must be used for educational expenses.

 

Payday loans

Payday loans are short-term loans designed to help you get by until you’re next paid. This means you’re usually expected to pay them back within a month.

Although they’re quick to get, they come with large costs. Interest rates can be very high, and improper use can result in unmanageable debt, so they’re best saved for emergencies.

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