When it comes to investing or making major purchases, there is little a person can do without borrowing money. This is because saving is not easy. Imagine trying to save £10,000 to buy a new car with your £2,500 monthly salary. Assuming you can only afford to save £300 monthly, it will take you nearly three years to save for the car. An easier option would be to apply for a £10,000 car financing loan and pay it back over the same period as you use the car. That said, few people can live without loans.
Types of Loans
There are many types of loans available in the market. Lenders normally create loan products to match the financing needs of their customers. For instance, there are school fees loans, car loans, home loans, development loans, salary loans and many others. However, all these credit facilities can be put into two broad categories; secured loans and unsecured loans.
i) Secured Loans
These are loans that are issued against a tangible security. This can be a house, car, stock certificates and any other marketable security. Some intangible securities, such as fixed deposit accounts and government bonds can also be used as security. The value of the asset provided by the borrower as security is what usually determines the amount of money they can get. For instance, if you present the log book of a car worth £10,000 as security, the lender may consider lending you up to £7,000, depending on their policy. Please note that it is only a reputable licensed valuer who will determine the value of the vehicle. This means that the car you think is worth £10,000 might actually be worth £5,000, in which case the lender will only approve a secured loan of around £3,000.
Once the lender approves your loan, and you accept the terms, a charge, or lien, will be placed against your vehicle. This charge will only be removed after successful payment of the loan. If you fail to pay the loan, the vehicle will be repossessed and sold to recover the outstanding loan balance.
With secured loans, lenders have something to fall back to in case the borrower defaults on the loan. That is why lenders are usually willing to issue secured loans even to borrowers with low credit scores. After all, they have everything to gain and nothing to lose.
Other types of secured loans include; car financing loans, home loans and mortgages. It is important to note that the item used as security for the loan must be insured throughout the term of the loan. This will ensure that in case of loss, theft or damage, the lender will not lose the security. Another important point to note is that the cost of borrowing secured loans may be a little bit higher owing to valuation fees, cost of placing a charge on the security and insurance costs among other types of processing fees.
ii) Unsecured Loans
Unsecured loans are credit facilities advanced to individuals or businesses based on their income earning ability. No security is required for this type of loan. This means that lenders are normally exposed to a lot of risk. That is why they normally rely heavily on credit scores. Individuals with high credit scores can get bigger loans at lower interest rates to be repaid over a long period of time. Those with poor credit scores, on the other hand, can only qualify for lower loan amounts that come with higher interest rates and must be repaid within a short period of time.
Once a loan has been approved, a standing order is normally placed on the salary account or business current account of the borrower. When the due date for the monthly payment arrives, funds are automatically deducted from the borrower's account and transferred to their credit account.
Conclusion
Knowing the different types of loans available to consumers can help you to make an informed decision regarding the best loan to borrow. Before submitting a loan application with any financial institution, you should consider taking your time to do some research on the types of loans offered by different lenders to identify the most suitable loan for your needs. Once you apply for the loan and get your application approved, you will need to service the loan without defaulting to ensure you maintain a high credit rating.
