Six of the main types of personal loans offered are outlined below.
1. Secured Personal Loans
This type of loan requires collateral of some sort. This may include property, land, a vehicle, or shares. As there is less risk to the lender, these loans often have lower interest rates. The trade-off is that if you default on the loan, your asset(s) can be seized.
2. Unsecured Personal Loans
An unsecured personal loan does not require any collateral, and eligibility is based on both income and credit score. The interest rates tend to be higher than on a secured loan. If you default on an unsecured loan, you will damage your credit score and may face additional fees (and potentially legal proceedings).
3. Debt Consolidation Loans
For those with multiple streams of high-interest debt, a consolidation loan can simplify matters. Combining multiple loans into one can reduce interest and potentially allow the debts to be paid off faster
- Co-Signed and Joint Loans
If your credit rating is poor, you may be able to access a loan if you have a creditworthy co-signer. They take equal responsibility for the loan (but don’t access the funds). Any defaults can affect both credit scores.
A joint loan is similar but both people can access the funds and are equally liable for repaying it.
Borrowing From Family/Friends
If opting to borrow from a friend or family member, it can be worth having a formal loan agreement so that you both know how much you need to repay and when. Many solicitors, such as the ones found at https://www.parachutelaw.co.uk/loan-agreement, can draft a loan agreement for you.
5. Fixed-Rate Loans
These loans have an interest rate that remains the same. Each monthly payment is the same and covers a portion of both the interest and principal amount. Most personal loans are fixed-rate.
6. Buy Now, Pay Later Loans
These loans are usually associated with buying products, and allow you to make a purchase without having to pay upfront. Instead, the cost is divided up into instalments which you have to pay (usually weekly/monthly).