What types of loan are there?

With so many different types of loan available for different purposes, looking for a loan can be a daunting task.

Here we take a look at the various types of loans, what they are used for, and their advantages and disadvantages.

Secured loans

If a loan is ‘secured`, it means it is secured against an asset that you own (typically your home, but it can be any item of a greater value than your loan). The asset you have secured is known as ‘collateral` in the loan.

Because these loans are secured, they are considered lower-risk by the lender. Because of this, interest rates may be lower than for unsecured loans, and the amount you can borrow is often higher. Repayments can also be spread over a longer term.

However, if you fail to keep up on payments, you stand to lose the collateral secured against the loan, so that your creditors can sell it off and reclaim their money.

Unsecured loans

An unsecured loan does not have any collateral placed against it, and therefore it is widely considered a lower risk to the borrower, as they generally stand to lose less if they run into trouble with payments. They are typically available in smaller amounts over a shorter period compared with secured loans.

That said, borrowers who fall behind on payments will still face consequences - in a worst case scenario, borrowers can receive court judgements which force them to repay the amount or face bankruptcy. In some cases the courts can even have the terms of the loan changed to become a secured loan, meaning it is still possible for borrowers to lose their homes or other assets.

Home loan

Home loans (or mortgages) are specifically aimed at funding the purchase of a home. Mortgages work slightly differently to personal loans, in that they normally require a deposit (usually at least 5-10%, although currently lenders tend to prefer closer to 20%), and usually last longer than other loans.

By default, mortgages are secured against your home, meaning your home may be repossessed if you fail to keep up on payments.

Debt consolidation loan

A debt consolidation loan is a loan obtained for consolidating a number of debts into one. Rather than giving the loan to the borrower, the money will normally be paid directly to the borrower`s creditors, after which the debt is repaid to the new lender.

Debt consolidation loans can potentially lower monthly debt repayments by a) spreading the loan out over a longer period of time (although this will involve paying more interest in the long run), and b) reducing the interest rates - especially if the loan covers high-APR debts such as credit cards.

Tags: types of loan, loan, loans

Fees payable when continuing service is provided. Repaying debt over a longer period may increase the total amount to be repaid. Calls are recorded and are usually free from UK landlines. Mobile phone users may be charged and should check with their service provider.