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what are the different types of loans?
what are the different types of loans?

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What are the Different Types of Loans?

It's important to understand the kind of loan that would best meet your needs before taking out just any loan.
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You can use loans to help you reach important life goals like going to college or purchasing a home that you otherwise couldn't afford. There are loans available for a variety of purposes, including ones that can be used to settle an existing debt. 

However, it's important to understand the kind of loan that would best meet your needs before taking out just any loan. Here are the most common types of loans and how they work.

Personal loans

Personal loans can typically be used for anything, unlike vehicle and mortgage loans that have specific uses in mind. Some people use personal loans for home renovations, weddings, or unexpected bills. 

Whether it's a home improvement loan or just a loan to cover a large expense, most personal loans are unsecured, which means they don't require any kind of security or collateral. They could have a few months to several years of repayment time and fixed or variable interest rates.

The difference between a secured loan and an unsecured loan is that secured loans require collateral as part of the loan agreement. If you don't have excellent credit or have a limited credit history, you can use a secured loan to build your credit. 

You can apply for personal loans from online lenders, banks, or credit unions throughout the U.K.

Student loans

Studying at a university can be expensive. In fact, tuition for universities in England can cost up to £9,250 per year, depending on where you study. Student loans can also be private loans.

Different types of student loans are available for undergraduate and postgraduate students, and eligibility will be determined by factors like your age and residential status. 

Private student loans are typically divided into two parts - tuition fees and maintenance loans. Tuition loans cover your tuition fees every year, while maintenance loans cover living costs. Tuition loans are typically paid directly to the university while maintenance loans are paid into your bank account.

Car loans

A car loan allows you to borrow the balance of the car's purchase price, less any down payment. There are different types of car loans available, depending on how you want to finance it - by outright buying it, or paying it off in instalments. 

Keep in mind that when you stop making payments towards your car loan, the vehicle is used as collateral and may be repossessed. 

Although lengthier loan durations are increasingly popular as car costs rise, car loan terms typically range from 36 to 72 months.

Mortgage loans

You can cover the cost of a new house with the help of a mortgage loan. With more than 11 million mortgages in the U.K., homeownership is more popular here than in many other countries.

Banks and building societies offer different types of mortgage loans and their loan terms vary. The most common mortgage runs for around 25 years, although they can be longer or shorter.

Some popular types of mortgages include fixed-rate mortgages, variable-rate mortgages, discount mortgages, and capped-rate mortgages. Around 75% of mortgages in the U.K. are fixed-rate mortgages, as they offer a fixed interest rate for a repayment period of between two and five years.

You don’t have to take out a mortgage for a new house only; you can get a loan from a mortgage lender for a second home, or buy a property with the goal of renting it out. 

Home equity loans

A home equity loan or home equity line of credit (HELOC) allows you to borrow up to a percentage of the equity in your home. A home equity loan works like an instalment loan, where you receive a lump sum and repay it over a specific period of time in equal monthly instalments. 

Home equity lines of credit work similar to a credit card; you can use the credit line whenever you need it during a "draw period" and only incur interest up until the end of the draw period. 

For example, if you bought a £100,000 property and you currently owe £30,000 on the mortgage, then you have £70,000 home equity, or 35% equity, as it’s often expressed as a percentage. 

Your property’s equity will increase as you continue to make monthly payments but remember that the equity can also go up or down, depending if the property value increases or decreases.

Payday loans

Payday loans are short-term loans that typically come with very high annual percentage rates (APRs). A payday loan requires full repayment by your following paycheck and is typically for smaller amounts. 

Payday loans are easy to get but difficult to pay back on time, so beware of these short-term loans as they can easily let you spiral further into debt due to their high fees and penalty charges. 

If you need money for an emergency, consider credit cards or personal loans. 

Debt consolidation loans

A debt consolidation loan can be used to pay off high-interest debt, like credit card debt. If the interest rate on these loans is lower than the interest rate on your current debt, you could save money. 

Due to the fact that there is only one lender to pay instead of multiple lenders, consolidating your debt also makes repayments easier to handle. Keep in mind that your credit score can increase if you pay off credit card debt with a loan because it lowers your credit utilisation ratio.

Debt consolidation loans come with various repayment terms as well as fixed or variable interest rates.

Credit builder loans

A credit-builder loan may not need a credit check or require a minimum credit score, and is intended to help borrowers with bad credit or no credit history rebuild their credit.

Typically between $300 and $1,000, the lender deposits the loan amount into an account, and you repay the loan over six or 12 months. 

You receive the funds back once the loan is paid off (with interest, in some cases). Make sure the lender reports the loan to the three main credit agencies (Experian, TransUnion, and Equifax) before you apply for a credit builder loan so that your on-time payments can boost your credit score.

Loans from credit unions

A credit union is a cooperative that aims to help its members pool their savings together. They typically offer among the lowest interest rate loans available and often have their own common bond.

Credit unions often charge lower interest rates that are around 3% per month. You can work out how much a credit union loan could cost by using a loan calculator, like the one on the Association of British Credit Unions (ABCUL).


No matter what kind of loan you are looking for, always consider the credit requirements and borrowing costs when comparing loan types. 

Remember that when managed correctly, a loan can boost your credit score. If you have a good credit rating you can increase your chances of being approved and getting lower interest rates.

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