Which Personal Loan is Best for Me?
The world of personal loans is vast, with a host of terms describing different options available. Loan types are generally named after their finer points, with titles telling you information about interest rates, payback times, or whether assets are required to secure that particular loan.
Types of Personal Loan
When working out which personal loan is best for you, remember there is often overlap between loan types. For example, a short term loan could be either unsecured or secured, depending on the individual’s credit history and reason for the loan.
There is also crossover with the reason you have for wanting to take out a personal loan. So a short term loan may be taken as a bridge loan, secured against your property. It may also be taken as a payday loan, and unsecured. See our guide to why take out a personal loan or find alternatives to a personal loan here.
Here the Guru sheds light on the different loan types you may come across on your adventures.
Also known as ‘signature loans’, unsecured loans are granted depending on your credit rating, rather than you having to put up assets as guarantors. With an unsecured loan you could borrow up to around £25,000 without needing to put an asset up as security.
A secured loan is covered – or secured – by an asset owned by the borrower. This asset then becomes a secured debt for the lender of the loan. They are often used for the likes of home extensions, or perhaps the need for a new car at short notice. Many providers offer loans for up to £35,000, over periods of five to 20 years.
The rate that’s fixed is the interest rate, so you pay the same rate of interest for the length of the loan. The rate of interest you pay on the sum you borrow is set by the lender and determined by the market.
With a variable rate loan, your starting rate of interest is agreed but it won’t necessarily be the rate you’ll pay for the lifetime of the loan. This means that the amount you pay back each month could change in the future, and in turn the total cost of the loan would alter too.
Instalment loans are a form of short term lending offered as an alternative to payday loans. With the latter, you’ll usually need to pay back the sum you’ve borrowed within one calendar month. Instalment loans can be a bit more flexible.
A guarantor loan is guaranteed by a friend or family member’s assets. They’ll also be accountable should you miss payments or fail to pay back the loan. With a guarantor, you could loan up to £10,000 over a period of one to five years.
A payday loan is a form of unsecured loan. You can generally borrow amounts between £100 and £1,000 – the sort of figures that could be covered by your monthly salary. You’ll usually pay it back along with the agreed interest within a few weeks or a calendar month, basically once payday arrives. Because the period of lending is short, the interest rates are generally very high.