Types Of Loan

There is a variety of types of loan available and many are provided with different repayment periods, interest rates and charges. While it may be necessary to shop around or consult a financial adviser before signing up to a package, it can help to be aware of the main kinds of lending that are out there.

Personal Loan
Personal loans are usually for amounts between £1,000 and £25,000 and are generally unsecured. This means that none of your own property or possessions are immediately at risk, although lenders may be entitled to take legal action if you default on repayments.

Interest rates may be fixed or variable and will probably cover a wide range depending on the particular details of the loan. There may be other costs involved with very low-interest deals, so it's often a good idea to check the small print before signing a contract.

If repayments become a struggle, lenders may be able to help. Most companies encourage borrowers to get in touch as soon as possible if problems do arise.

Secured Loan
If you have a bad credit rating, a secured loan can be used to avoid incurring high interest rates or penalties by attaching the balance of your loan to an item of your property, such as your house or car.

Even if you have a good credit rating, this kind of security is typical for loans over £25,000 or over very long repayment periods. The maximum amount you can borrow is usually based on the value of the property, although for very large amounts you may be limited to a multiple of your salary.

As with all secured borrowing, if you do not keep up repayments the lender may be able to repossess your house, car, or whatever other property the loan is attached to.

Homeowner Loan
A homeowner loan is usually provided on the basis of the part of your house you own outright, the surplus equity. That is to say, any outstanding mortgage on the property is subtracted from its market value to determine the amount against which you can borrow.

However, some companies offer deals of up to 125 per cent of equity value at a higher interest rate. The higher cost of such a package may be necessary if a large amount of cash is needed, or if the property market slumps and equity falls.

Car loan
When you buy a new car, it is likely that you will be offered a higher-purchase or finance deal to help spread the cost, if you are not paying in full right away.

As usual though, there might be a saving to be made by taking out a car loan from an institution other than the one which sold you the vehicle. This would be secured against the car, putting it at risk if you default on repayments.

Bridging loan
A bridging loan fills the gap between purchasing a new home and getting rid of your old one. It is usually a costly method, however, so is a last resort for many people.

There are two types of bridging loan - open and closed. A closed loan is when you know your own property is sold, but need a little extra cash to complete the purchase of your new house. An open loan is for when you've bought a new house before the sale of your old one.

Banks are less likely to give you money for an open loan as it is a riskier prospect for them. If you do apply for this type, you can expect to be asked a lot of questions and will probably need to supply a lot of supporting information for your claim.