We explain the main kinds of loan and guide you through the good and bad points.
There are only a few types of loan that people are likely to want to apply for. Broadly speaking, there are loads of kinds, from secured to unsecured, long to short, business to personal but most people who need a lump sum of money will look at bank, payday, doorstep loan and online/instalment loans.
These generally come under the umbrella of long-term loans as the repayment period can be anything over a year (although, some banks can offer shorter loans). In order to be eligible, you usually need a good credit record and the ability to prove you have solid income.
People often perceive banks as being more trustworthy than payday lenders and other short-term loan companies.
The rigorous application procedure and screenings mean some people feel more secure in the knowledge the bank is confident they won’t have a problem paying the loan back.
Interest rates are often lower than short-term borrowing.
Loans from a bank tend to be over a longer term which may not be suitable.
The minimum loan amount tends to be a one thousand pounds, so it’s not great for people who only need a small amount of cash.
Can be charged more if you miss a repayment.
Available both on the high street and online, these are for relatively small sums borrowed for short periods and aren’t secured against a valuable asset.
The application process tends to be quick.
You’re able to repay the debt fast, in one lump sum by your next payday – which explains the name.
Whilst they look at your credit score, some might place less emphasis on it than is often the case with more mainstream forms of lending.
Higher interest rates are often a downside of services where you can get money quickly.
You may be charged more if you miss a repayment.
Doorstep loans are short-term loans which are not secured against your home or car. You don’t usually need to give your bank details because most lenders deliver cash to you and you pay your loan in cash.
Even if you have a bad credit rating, you may be considered for a loan.
You get access to the convenience of a company representative, who’ll come to your house to issue your loan then return every week so you can make repayments.
You’re also be able to talk to the company representative face-to-face about your loan situation should you have nay questions or problems
The interest can be higher than with mainstream lenders, but is competitive with other short-term loan companies.
Not suitable if you’re a first-time applicant who wants to borrow more than £1,000.
Although these appear similar to payday loans, they can only be found online and often allow for more repayments over a longer period, instead of paying the balance off in one or a handful of payments.
In some cases the money can be in your account within a few hours or minutes of the loan being approved.
Amounts from a few hundred pounds to a couple of thousand are within easy reach, and some lenders place less of an emphasis on your credit rating.
You’re able to pay off a loan in small amounts over weekly or monthly terms.
You could be charged fees if you miss a payment.
High interest rates can make it a costly way to borrow money.
Credit Union loan
These are local set-ups that offer unsecured, short-term loans. Generally, they only lend to people who live in the town, city or county that they operate in and are members as they only lend money already deposited within them.
A low credit score is unlikely to hurt your chances of getting credit.
Some credit unions allow you to choose between different repayment schedules, such as weekly or monthly. They’re ideal for those who want the choice.
These lend at a lower interest rate, making them a cost-effective way to borrow.
Some Credit Unions may not lend amounts under £100, which might not appeal to people who want a smaller sum.
Usually, Credit Unions only provide financial services to members. If you don’t meet the criteria to join, there’s a chance you won’t be able to borrow from one.
You often need to have savings with a Credit Union before it’ll lend to you, so it’s not ideal if you need money in an emergency.