Loans and financial-speak can be extremely confusing as well as time consuming. In financial emergencies or at times when you need to act quickly, you might need to cut through all the banking jargon, as it is important to understand the terms and loan types to help you make the best fiscal decisions for your circumstance.
Here at Wizzcash, we want every individual to be equipped with an understanding that helps them make smart and sustainable economic decisions that help to protect financial security. That’s why we have compiled a full guide and jargon buster that could help you work out which loan type suits you best.
Unsecured and Secured Loans
Typically, loans are calculated and issued based on a credit score, which will be based on the borrower’s historical and current financial standing, as this will affect their ability to pay back the loan. An unsecure loan does not require borrowers to put anything up as collateral or use valuable assets to borrow against.
Unsecured loans are widely available and most common for low to mid-value personal loans. Must Compare reports that they are available with a value up to £25,000 (approximately). They can offer a borrower a lot of flexibility as they can be customised or chosen dependent on the repayment period and value borrowed. Typically, an unsecure loan is repaid over 3 to 5 years. Often, using an unsecure loan over a short period of time is more costly as the interest rate will be higher. There might be early repayment fees, too.
In contrast, a secure loan is money borrowed against an asset, most commonly a property. This means that secure loans are available to fewer people, as many prospective borrowers might not have the available assets to borrow against. As standard, a secure loan will have a lower interest rate as it is less risky to lenders, despite the fact that they are usually for larger sums. This is because the asset guarantees the lender will receive the value of the loan. They could be riskier for the borrower, as a lender can take control of assets if the terms of the loan are not met.
Choosing between a secure and unsecure loan will largely depend on the borrower’s circumstance. Factors such as assets, value of the loan and the desired repayment period will affect the type of loan that is available. Always compare loans if you are unsure about which will suit you best.
A direct lender is a simple term, as it simply means that there are no third party brokers involved in the loan. There are distinct benefits for using this kind of finance sourcing, such as quicker access to funds, however it might be better to use alternative financial services in some cases. This is because for larger loans, such as mortgages, it is often best to use a broker to help navigate all the options available to you.
A borrower can benefit from utilising free comparison websites (this will be available depending on the type of loan they are seeking) and then going straight to the direct lender. They can benefit from reduced or no application fees because the broker does not impose a commission. Often, brokers will charge an upfront fee. Whilst this is not illegal, it is suspect and frowned upon by the Financial Conduct Authority who regulate them. The applications are often more streamlined and the information can be processed quicker with direct lenders, thus providing borrowers with access to instant loans.
Funds will also be paid directly into the borrower’s account which also speeds up the process. If you are not approved with a direct lender, your information could still be passed on to other financial institutions for alternate funding options. If you have taken out existing financial services from one bank or lender, you might be best going direct to them (depending on the loan type) as they will already have access to some of your credit information and the process could be even quicker and the rates could be slightly better, too.
A personal loan is perhaps the most common kind of loan as it allows a borrower to pay back a fixed value on an agreed timetable (usually every month). A personal loan is usually an unsecure loan; thus, no collateral needs to guarantee the loan, making it an available option to many people.
The rate offered for a personal loan will depend on the borrower’s credit history and current rating. This could be a detrimental or expensive method of borrowing money if an individual has a poor credit score, as they might be subject to a much higher interest rate or APR (annual percentage rating).
A personal loan is not always fixed; This means the interest rates may fluctuate, but this is something that should be made clear during the initial agreement or quoting stages. Extra costs, such as a set up fee, may be added to the first month’s payment.
It is possible to get a secure personal loan, but this is typically for a higher value that makes it worthwhile to the lender. However, if a borrower is seeking a larger loan, there are often fewer options available to them.
All personal loan agreements are required to have a 14-day cooling off period for all parties to withdraw from the agreement.
What Can A Personal Loan Be Used For?
- Debt consolidation
- Home repairs
- Wedding loans
- Vehicle financing
- Funeral financing & familial care, such as medical or veterinary bills.
The purpose of a personal loan will sometimes need to be determined during the application process and some are more ‘sensible’ than others. It is important not to take unnecessary loans as they should be used to for something vital or unavoidable.
A personal loan could be a suitable method for managing debt, but this will depend on the value of repayment and interest rates (as typically, multiple debts will not feature in a favourable credit score).
Peer To Peer Loan
Both lenders and borrowers can sign up on secure, peer to peer lending platforms, which allow individuals to lend or borrow as they see fit, away from standard banking set ups. Lenders on P2P (peer to peer) platforms can be corporations or individuals. A peer to peer loan is another kind of unsecure loan, except lenders are typically more prepared to offer loans to high-risk consumers but will still charge a much higher rate.
Individuals that lend money sign up to provide money to yield the value of the interest and thus, P2P can be considered a kind of investment, but this is classed as income and can be taxed depending on the value earnt. However, it can be particularly risky to lend money via a P2P site as the borrowers can be high risk. If you are considering borrowing or lending on a P2P platform, it is vital that you ensure it is registered by the Financial Conduct Authority. This means that financial service providers are regulated and should adhere to the rules set out for them by the FCA, designed to protect and ensure consumer rights. In this case, it could protect borrowed, repaid or lent as the P2P provider is required to keep this in a separate ‘buffer’ account known as a ring fence.
A guarantor loan is still a kind of unsecure personal loan, it just requires a co-signatory to provide the lender with enough confidence that the value will be repaid. A guarantor loan does not require both parties to repay, in fact, it is usually a viable option for individual with a bad credit score who have been refused a personal loan as a single entity.
Guarantor loans are a popular method for those looking to improve their credit file even as they take out a loan, but this only works if the borrower meets all repayments as scheduled. A guarantor will be called upon if the primary borrower does not meet a payment schedule. If this happens, the repayment protocol will depend on the individual loan. It can be the case that the guarantor must take over complete responsibility at this point, or they may just be required to cover the single, missed payment whilst the primary borrower resumes all other repayments.
There are restrictions on who can be a guarantor as they need to demonstrate to the bank or lender that they are a safe and reliable source of repayment. Most lenders will set out a minimum credit score requirement for all guarantors and they will need to be over 21 years of age. They are also not permitted to be ‘financially connected to you’, for example, a dependent or spouse.
Due to the higher risk of a guarantor loan, they are usually charged at a higher rate of interest to a standard unsecure personal loan.
Credit Union Loans
Credit unions are like financial cooperatives, run by their members but still regulated by the FCA as well as the Prudential Regulatory Authority (PRA). You must belong to a credit union prior to taking out a loan, which makes it an unfeasible option for many borrowers, particularly those with a lesser income as it is dependent on having enough money to save regularly. Individuals will have to meet a minimum period before they can take a loan out. This prevents people just looking to borrow money from joining, ensuring the union is sustainable and helpful for all members.
Essentially, members pay into their credit union and can take a loan out from the amassed value if they need to. These are typically not for profit organisations, providing low-rate loans to their members. The Money Advice Service claims that most credit union organisations charge 1% interest per month.
Almost all other terms of a credit union loan are the same as a standard unsecure loan.
Debt Consolidation Loan
A debt consolidation loan allows borrowers who are juggling multiple repayments to combine their debts into one place. The idea is that this makes them easier to manage and rather than multiple payments to keep track of, a borrower can simply pay back money to one place. It is vital to stress that a debt consolidation loan does not pay off or write off debt. It simply allows individuals to transfer what is owed into one place.
Debt consolidation loans will need to be borrowed to the value of what is owed. The money is borrowed from a single provider and can be split to wherever the borrower owes money, thus, they have consolidated their debt into one place making it ‘tidier’.
A debt consolidation loan will require a hard credit check on your file, which, if rejected, can negatively impact your credit score. The premise is that focusing on just one payment improves the likelihood of making it on time. A debt consolidation loan will not always help individuals get out from high-interest loans. Before committing to a debt consolidation loan, all borrowers should calculate the cost of the repayments, as this new loan may be spread over a longer repayment period and thus increase the total cost of repayment. Moreover, there could be a penalty cost for early repayment which, if applicable to several debts, could outweigh the benefits of the new loan.
All loans should be considered carefully, but it is vitally important to compare the pros and cons and work out all the financial effects of a debt consolidation loan. In some cases, it could save you money and help boost your credit score, but this is not guaranteed.
Homeowner Loan and Mortgages
A homeowner loan is often confused with a mortgage because they seem similar. However, a homeowner loan can only be lent to someone who has equity within a property. This is because the equity of the property is put up as collateral or as a guarantee that the loan will be repaid. It is only possible to borrow a set percentage on the owned value of the property, other factors include;
- Annual Income
- Credit Rating
- Age Versus Term Of Loan
Homeowner loans are dependent on loan to value amounts (LTV), which is the amount that can be borrowed and is dependent on the value of your property. Any outstanding mortgages will also need to be deducted from the LTV amount.
A mortgage is one of the most well known types of loan as it is usually the only way to afford to buy a house, without a large amount of capital backing. There are four key types of mortgages, but this does not include re-mortgaging loan types:
- Offset Mortgages
- Discount Mortgages
- Tracker Mortgages
- Fixed Rate Mortgages
Typically, a mortgage is set for a period between two and ten years before it comes up for renewal, however terms are sometimes much longer; this can allow homeowners to lock in a fixed term interest rate for a set period of time. This means monthly repayments will not be subject to fluctuations. The rate you are offered in a mortgage agreement will depend on:
- You deposit
- Value of property
- Your monthly income (this will impact how much you can afford to pay in repayments)
- The interest charged
- The time you wish to spread the mortgage (standard is 25 – 30 years)
- Incorporation of any government schemes, such as help to buy, rent to buy etc.
For most people, there will be no avoiding a mortgage. To ensure you are getting the best deal, you should always compare your mortgage offers. The rates available to you will depend on the factors listed above. A mortgage adviser can help you select the best choice for you, taking into consideration your specific circumstances.
Other important things to know about a mortgage is that most people decide to remortgage or renegotiate their mortgage after their fixed term period is up. This ensures they are consistently getting the best deal.
An interest-only mortgage will be at a much lower monthly cost, but you will not be gaining any equity within the property. It could be used as a semi-permanent option (throughout the term of the interest only mortgage) which may allow you the financial freedom to recover from other debts or make it through a strained period without making drastic changes to your home or lifestyle. Regulators within the industry are becoming more wary about this loan type though, as after the term of the loan, you could be left with the cost of the asset. It is always best to check with a qualified mortgage advisor beforehand who will be able to provide impartial advice on your situation. You will be able to assess and evaluate your options properly before committing.
A bridging loan is a way to access stop-gap funds on a short-term basis. Unlike a standard 3 month loan, or similar, a bridging loan is often a secured loan, meaning property or valuable assets must be used to protect the repayments. A bridging loan is typically charged at a high rate as it takes advantage of the cost of opportunity; they are typically used by those who are looking to buy property at auction or by those who regularly flip renovated houses and want to move onto the next project (developer loan).
These are also monitored and regulated by the FCA. The requirements of a bridging loan will depend on whether you are using it for domestic or commercial purchasing. The types of bridging loan are:
- Closed Bridging Loan
- Open Bridging Loan
Bridging loans are available as second and primary charge on top of a senior debt. This just means that the lender will determine the priority of repayments, as the borrower is likely to have other repayments to pay off (such as mortgages and perhaps other loans in the case of development projects). This helps protect the lender and reduces the risk of the loan for them, as it enables them to call first-priority on any property sale or money available for repayment.
Auto Or Car Loan
Typically, car finance options from automotive providers are high interest and expensive. However, they are sometimes the only option, depending on the finances available, but this allows you to buy a vehicle without the full amount upfront is a car loan. These vary a lot; from some providers, you will not own the car until you have fully paid off the debt and the consequence for missing a payment could be that the car is reclaimed by the financing company, essentially acting as an asset and a secure loan. Many of these are also balloon-payment schemes, in which the monthly repayments are relatively low (in comparison to the value of the car) but a percentage is due at the full term of the loan, i.e. after 3 years.
An alternate way to source financing for a car is a personal loan. This allows you to borrow a lump sum and buy the car outright but could result in higher repayment. The best thing to do is to ensure you are comparing your financing options before making any decisions. A breakdown or anything that effects your ability to get to work (and thus has an impact on your income) could be a considered a financial emergency. At this point, some people may consider applying for an emergency loan but of course, applicants will still need to meet certain criteria.
Payday loans are a type of stop gap loan that is designed to get you through to your next payday when unexpected and unavoidable costs crop up. All payday loans are subject to a strict lending criteria and you should ensure any potential provider adheres to these and is properly regulated by all the appropriate authorities, including the FCA. A payday loan cannot be used as a way to consolidate debt.
A payday loan is not suitable for everyone and is not a reliable source of financing that should be depended upon regularly. In fact, it should be considered a one-off type of loan. Responsible lenders will be able to point those who are struggling to manage their debts towards money or debt advice services. It will be important to evaluate the interest rates and the cost of the terms before deciding which option is best for you.
One of the unique things about a payday loan is that it provides the borrower a lot of flexibility. For example, the average loan size is approximately £260. This can be with the borrower almost immediately. It will depend on the circumstance of the application, but it is possible to have a same day loan for smaller value loans, such as a payday loan. The interest rates incurred with this type of loan are now capped by law. This means, a borrower can only be charged a fixed rate default fee (set at £15) and the total cap is 100% of what was borrowed, i.e. if you borrowed £100, you will not pay back more than £200 including the default fee.
Short Term Loan
A short term loan is also a temporary financing option for those who are unable to make ends meet due to unforeseen circumstances. Theses are typically capped at a value of £1000 and eligibility will depend on a soft check as well as the applicant’s monthly earnings.
Typically, short term loans are used for low value, quick financing that is only spread over a short repayment period. Of course, this can affect the repayment costs, as a general rule of thumb for loans is; high value loan = long repayment term and thus low interest and vice versa. Of course, there are always exceptions, but this is applicable to short term loans.
The difference between a short-term loan and a payday loan is that a short-term loan will be repaid over a set period of time (maximum of a year) whereas a payday loan is a more immediate, one-time repayment. It will be important to consider which kind of repayment is realistically achievable when considering these kinds of loans. They can be extremely helpful for those struggling or experiencing an unexpected financial emergency.
However, as with payday loans, short term borrowing is not a sustainable income and should not be treated as a regular fall-back option for financing. Furthermore, a short-term loan can come at a great cost in terms of repayment and other options for sourcing finance might be better suited to your circumstance.
For more information on short term financing, or if you are looking for quick cash during a financial emergency such as a quick loan, you can apply with Wizzcash online. Our lending criteria and how our loans work is all available online so you can be fully informed before you commit. For more information, you can always contact the team.