There are so many loans out there on the market, it’s baffling. Entire business models are founded around helping us trudge through them to find a financial product that might be suitable for us. Depending too much on these tools and price comparison websites, and even third-party brokers to an extent could be a little risky because customers might not be completely clear on the loans they are taking out. With all the things you are committing to for a long time, it’s crucially important you understand the nitty-gritty details.
The loans we’re going to be talking about are the most common online loans that are likely to be an option for you. It’s so time-consuming to filter through all the loan types and translating the financial jargon into something sensical but using a broker or a search engine could leave you in the dark, so we have put everything in simple terms for you.
IMAGE: PEXELS
Personal Loans
A personal loan is the most common type of loan available online. They are available from both traditional banks as well as online lenders and they could provide consumers with funds up to £25,000. Typically, traditional brick-and-mortar banking institutions will only be able to offer personal loans up to £15,000 because they are more risk-averse than online lenders and they might also not have the capital to actually lend the higher amounts to customers.
Customers are afforded so much flexibility when they choose to take out a personal loan. You can select the specific amount you wish to borrow, which means you can work to ensure it is an affordable and sustainable means of financing for individual circumstances.
Personal loans are a type of unsecure loan, which means you do not have to put up any kind of collateral or asset within the terms of the agreement. It’s a simple means of borrowing, you can go directly to an online lender or opt to go through a third party broker (though this might incur some fees, which is always worth checking). You decide how much you want to borrow; the lender will perform a credit check once you have submitted an application and make you an offer if you are a suitable borrower to them. From here, the money could be directly transferred into your account and monthly repayments start the following month (in most cases).
A personal loan does not always have a fixed interest rate, which means the monthly repayments may fluctuate. There is a 14 day cooling-off period, in case you change your mind and wish to cancel. You will then have a set amount of time to repay the money.
How Much Will A Personal Loan Cost?
A personal loan will be calculated depending on the applicant’s credit history and credit score because a lender will adjust the overall cost in line with how risky a borrower appears to them. This means that one person might get a better APR offer than another even from the same lender and for the same sum. This makes it hard to say how much a personal loan will specifically cost any one person.
Personal loans are typically taken over an extended period of time and this is also usually quite flexible to the borrower. This provides consumers a lot of control over their finances because they allow consumers to create a timetable, which could suit how they wish their financial futures to go, factoring in new outgoings or life events like buying a house.
It is worth noting that any administration or set up fees incurred could be charged during the first month, which means the initial bill might be higher than expected.
What Can A Personal Loan Be Used For?
Personal loans can be used for so many things, including:
- Debt consolidation
- Home repairs
- Wedding loans
- Emergency financing
- Car financing
Personal loans are safe and common, with quite a low APR in comparison to other sources of credit. This is one of the reasons they are so popular.
Payday Loans
A payday loan or short term loan is a type of temporary financing. These are almost solely offered online and get quite a lot of air time in the news, especially as major lenders in the market fold and cease trading, leaving consumers unsure about their finances.
A payday loan is designed to provide a stop-gap of funds to a customer to help them through until their next cheque comes in. These are low-value loans that provide customers with quick access to cash, from anywhere from £50 – £2500. This can be an extremely convenient method for raising funds quickly, especially because consumers can request a specific amount of money they need.
There is a small difference between a payday loan and a short term loan. The first will mean the consumer is required to pay back the money borrowed on their next pay date. Whereas a short term loan means the cost of the loan will be spread in equal payments over a set period of time (with a maximum of a year). The latter is considered a more manageable means of financing but does not necessarily work out cheaper because the interest is applied over a longer period of time. Customers considering these loans will need to consider which kind of repayment structure is most realistic for their situation.
Both types of loans are a high-cost type of credit, which means the interest is quite high and will cost the customer a lot to borrow. There are cheaper options of borrowing available, which is why payday loan lenders typically only encourage their customers to apply with them in a real, financial emergency. In turn, there is no real legislation or monitoring for how the money borrowed will be used.
The payday loan industry comes under a lot of heat from the media. This is usually because lenders could be mis-selling loans or customers are failing to learn as much as is necessary to fully understand the gravity of this kind of loan.
Debt Consolidation Loans
Applying for a debt consolidation loan online could be an efficient and cheaper way to meet your repayments for multiple debts. The structure is simple, a consumer with several debts can amalgamate them into one place, typically somewhere with a low yield interest which makes it cheaper in the long run.
For a debt consolidation loan to work, consumers will need to be able to source a loan online that is big enough to cover all their debts. After a successful application and the loan terms have been agreed between the parties, the borrowed money should immediately be used to pay off all existing debts in full. Following this, the outstanding debt will be owed to one lender. Debt consolidation does not write off or get rid of any debt.
A personal loan is an effective method to consolidate debt because the amounts available from online providers means that consumers can cover all their costs. It is really important for individuals to weigh up the pros and cons and total financial costs of a debt consolidation loan. If customers are subject to high early-repayment costs, it might actually take away any financial benefit earnt from combining the debt into another loan.
Debt consolidation and refinancing is available for student debt as well. Just make sure you reach out to a trusted student loan lender.
Benefits Of Debt Consolidation
The biggest benefit of a debt consolidation loan is that it makes repayments more manageable. For example, if you have 5 different outgoing dates for debts in a calendar month, all of which are for different amounts, it is easy to forget a payment or get them mixed up. This could run a higher risk of a missed payments and the implication that can have on your credit score.
Debt consolidation loans could also make budgeting and financial goals more achievable, too!
Homeowner Loans
Homeowner loans are not mortgages, because they are not a loan that is designed for consumers to buy a house. A homeowner loan can only be taken out once someone already has a house or possesses equity within a property. A homeowner loan can run on terms from 1 to 35 years and is a secure loan. This means that a consumer will need to put the equity within the house or property up for collateral for the loan.
Equity is the value of the property you have actually paid off and this is what will be evaluated by lenders. This will also be based on the market value of the property. The more equity a consumer has within their property, the safer they may appear to a lender but other considerations to calculate the loan include:
- Household income or income of the applicant
- Credit score and history of repaying loans
- Ongoing financial commitments
This type of loan is typically requested because property owners wish to borrow a large sum of money, typically upwards of £15,000. Choosing to do it this way is riskier, because missing repayments could result in losing their home, however, it could offer smaller and cheaper monthly premiums, but the difference may be minimal.
This might also be a suitable option for someone who has bad credit. It is vital to bear in mind that missing a repayment can have severe consequences.
What Are Homeowner Loans Used For?
- Home renovations
- Debt consolidation
- Major emergency bills, such as medical expenses
- Supplementing retirement funding
These are the most common types of loans available online. There are so many other types available, including peer to peer lending, which consumers should be very vigilant when using. However, a personal loan is the simplest type of credit to access. The market is competitive, and consumers might consider going direct to a lender that can also act on their behalf as a broker.
Other common types of credit, like an auto loan (car financing), might be more expensive than a personal loan. Furthermore, student loans are also extremely common and although these can be applied for purely online, they are not considered consumer credit and government subsidies are available to provide detailed help and assistance.
If you are interested in even more business-related articles and information from us here at Bit Rebels, then we have a lot to choose from.
COMMENTS