Different Types of Loans Explained

A loan is an all encompassing term that refers to any type of money you have borrowed in some form. Although we often think of a typical loan from the bank or a credit card, there are many different kinds of loan, each with their own pros and cons. The one you choose will be dependent on your individual needs.

Credit Cards

Perhaps the most common form of loan is the trusty plastic known as a credit card. It has facilitated cashless payments across the world and allows you to borrow on a recurring basis, so long as you stay within your set credit limit. These are ideal for month to month expenditures and larger one off purchases. You are charged an interest rate on the outstanding balance on a monthly basis (typically between 9 and 19%) and you are only required to repay a small minimum on that outstanding balance each month. If you pay off the balance in full before the next due date, you are not usually charged any interest.

Credit cards are extremely versatile, allowing the user to withdraw cash from an ATM and pay for goods and services almost everywhere online or offline. It is up to you how much of your total limit you use at any given time.

Common card issuers include Mastercard, Visa, American Express, and Discover.

Personal Loans

A personal loan is the type of loan most individuals apply for at the bank or other large lender for their own private purposes (as opposed to starting a business or taking out a mortgage). They are usually unsecured (no form of collateral like a home or other valuable item to back it up) and are taken out over a medium to long term basis. This means the principal amount and any interest is repaid in installments over several months. It is usually applied for by borrowers who want relatively fast access to credit and have determined a credit card isn’t suitable. Most people with a fair credit score and a regular source of income will have access to some form of personal loan product. Most personal loans are for at least a few hundred dollars and regularly go in to the thousands. The longer the term, the more that can be realistically borrowed, however the higher the overall amount of interest that you will pay.

Payday Loans

A payday loan is a unique concept within the loan industry that does not typically come with any installments. The borrower is required to pay the full amount back with any fees and interest, in one lump sum, only a short time after it is issued. This is usually about two weeks. The reasoning behind this is that these loans are designed to help tide you over until your next pay check arrives. They are commonly used by those who have gone over their budget that month or were faced with some kind of unforeseen expense or emergency, and don’t have other access to credit or savings. Payday lenders tend to be more lenient with approving loans than banks or large lenders, but they also tend to deal with smaller sums of money.

Overdrafts

An overdraft is a product offered by banks that allows the customer to go overdrawn on their checking account, effectively creating a line of credit. The customer is not penalized or charged for going overdrawn like normal, as long as they stay within the overdraft limit. They may be charged interest on the outstanding balance on a monthly basis like a credit card, or pay a regular fee for using the overdraft. An overdraft is the perfect way to protect yourself from unforeseen withdrawals or to use for short term borrowing.

If you had an overdraft of $200 and only have $100 in your account, you could charge $300 to your account because of the overdraft.

Mortgages

Mortgages are a secured loan exclusively used to fund the purchase of real estate. They are therefore for large sums of money and span many years in repayments. Because of the sums involved they are also one of the most stringent, requiring the borrower to divulge lots of info about their financial situation, history and even personal life. Like all loans mortgages come with an interest rate (this may be fixed or variable), which is usually paid off first before you begin paying down the principal itself. Mortgages are one of the only ways most people are able to purchase a home if they cannot afford one outright. Over time you may be able to take out a second loan on the equity from the mortgage, meaning if you’ve paid off x amount, that amount can be re-borrowed.

Your Quick Guide to Bridging Loans

For many people, bridging loans can represent a short-term solution to a temporary problem. However, they shouldn’t be seen as a long-term answer to your financial worries. Instead, bridging loans should be used to bridge the gap between a debt coming due, and the main line of credit you need becoming available. In certain situations, pressing circumstances can allow for bridging loans to act as a short-term source of credit.

These types of loans can be very valuable when it comes to allowing for a property purchase that couldn’t be otherwise possible. However, as you would expect with any other short-term solutions, these loans are also significantly more expensive in terms of interest fees.

How do Bridging Loans Work?

In simple terms, bridging loans are designed to help people finish the purpose of a property before their existing home has been sold off. These loans allow people to get short-term access to new amounts of money at a higher than usual rate of interest. Aside from helping people who are moving home to bridge the gap between completion and sale dates in a chain, this type of loan can also be very useful for someone planning to sell their property quickly after they renovate their home.

Since many building societies and banks have recently become more reluctant when it comes to helping people get the money they need in the wake of the latest financial crisis, there has been an influx of new lenders emerging in the market. However, it’s worth noting that interest rates are often high and hefty administration fees can be placed on top of everything else. Indeed, many optional borrowers should think carefully before taking out a bridging loan.

Who Should Get a Bridging Loan?

Bridging loans are a unique and complicated form of credit. In most circumstances, these solutions should not be considered by someone who is simply looking for a short-term line of credit. Instead, bridging loans should be aimed towards amateur property developers and landlords, including people who are considering purchasing a property at auction when a mortgage is needed.

In certain circumstances, bridging loans may occasionally be offered to asset-rich or wealthy borrowers who want to access a more straightforward form of lending on residential properties. At the end of the day, if you are unsure whether a bridging loan is the right option for your specific needs, then you might need to consider talking further to a bank or building society about your reasons for seeking credit, or ask for help from a financial advisor.

Bridging loans can be used for a wide range of different reasons – from investing in properties, to dealing with buy to let investment procedures. However, recently, there has been a significant recent trend among some borrowers to utilise bridging loans when private banks and high street lenders take too long to process the applications involved for larger home loans. Some borrowers are also looking into bridging loans as a simpler and less frustrating solution to mainstream lending options.

Should you Get a Bridging Loan?

The important thing to keep in mind is that while a bridging loan may originally seem tempting, if you’re thinking of taking one out for yourself, then you’ll need to think carefully about your available exit strategy. For example, this might involve thinking about your choices in regards to mainstream mortgages and buy to let mortgages instead.

The problem is that you may always be rejected from a mortgage with a mainstream lender if you have already taken out a bridging loan, which means that you are at risk of losing your home. At present, the financial conduct authority is concerned that advisors may still be recommending this form of loan to some borrowers when it isn’t really the best solution for their needs. In other words, if you haven’t used this type of finance before, then you should consider it with absolute caution, as there are regularly hefty and hidden legal fees to consider, as well as additional administration fees that aren’t always clear.

In basic terms, it’s worth remembering that the costs of a bridging loan can quickly and easily mount up and sometimes become overwhelming to those involved with them. As such, you should not consider a bridging loan to be an alternative to other mainstream lending solutions.
Where to Look for Bridging Loans

Today, bridging loans can be accessed from a range of different lenders in various shapes and sizes. The best way to protect yourself when getting a bridging loan is to look around and ensure that you’re getting the best possible interest rates for your existing circumstances.

It’s also important to make sure that you choose a lender that has been previously approved by the FCA, so you can reduce your chances of being scammed by a lender who doesn’t have your best interests at heart.

Loan Options for Younger Borrowers

When young adults move into their first apartment, start their first job, or become students, they often find themselves seriously struggling with money. Being able to get access to all of the cash you need can be extremely difficult when you don’t have any assets, and you’re just getting started in life. Because of this, some younger people turn towards the idea of loans to help them get through the first stages of their independence.

The first thing to understand is that when you want to pick a loan, there are several different solutions to choose from. If you are a student, you’ll probably find that a student loan has the lowest interest rate, and you can start repaying it after you have started working – which removes some of the stress from your shoulders.
There are also a wide range of personal loans available from a variety of lenders. However, before you pick any particular lender to deal with, you should take the time to plan out your needs and think carefully about how much you’re going to need to borrow, and what you can afford to send back to banks or building societies in the form of repayments each month.

Deciding on the Ideal Loan

As a young borrower, the last thing you want to do is borrow more than you can handle and end up overstretching your finances. Not only will this place you in a difficult position immediately with debts and repayment problems, but it will also have a negative effect on your credit rating – and the history that will follow you for the remainder of your life.

Think carefully about what you need to do with your borrowed money, and cautiously look for a loan opportunity that you can afford to pay back every month – without fail. For instance, you might want to use your first loan to purchase a car so that you can get to and from work. By taking a loan out from the bank, you will be expected to pay back the amount you have borrowed in segments over time, along with the interest on that amount. If you don’t stick diligently to your repayment plan, you could have to face serious charges and fines.

Keep in mind that in most circumstances the more you borrow, the higher the interest rates will be. In the same vein, the higher your interest rates are, the longer it will take for you to repay the loan, and the more you’ll pay to the bank or building society in terms of interest.

What if you Have Bad or No Credit?

First of all, remember that there’s a big difference between having bad credit and having no credit. However, no matter which of these situations you find yourself in, the chances are that they will make it tougher to get the loan you want with the interest rate you would prefer. If, as is the case with many young borrowers – you don’t have any credit rating behind you at all because you have never taken out a loan, then your banks and building societies can’t be sure whether you have any good habits or bad habits with paying money back. Alternatively, if you have a bad credit rating, this could be because you have suffered from bankruptcy, CCJs, or simply missed some repayments on the last loan you took out.

Though having bad credit or no credit can make applying for a loan successfully far more difficult, it’s also worth noting that this doesn’t necessarily mean you won’t be able to get the cash or credit that you need. Instead, it simply suggests that you will face higher interest rates and access to smaller loans. The reason for this is that the most valuable loan deals are reserved for those who have the best credit histories, as well as a stable job that ensures they can make repayments on time every month.

Improving your Credit Rating

If you want to improve your credit rating and therefore improve your chances of getting a good deal on your loan, then there are plenty of great ways to do this, from making sure that you are included on the electoral roll with your local government, to ensuring that you always pay off your credit card bills on time. Make sure that you have a plan of action ready for when you get a loan that ensures you will always make repayments according to the schedule that has been set for you. The more reliable you are with your payments, the quicker your credit history will begin to develop at a positive level.

Also keep in mind that even if you do have a bad credit history, your credit rating isn’t always the only factor that lenders will consider when they choose where or not to lend you money. They’ll also need to think about your salary and any other assets you own.