Are you looking to borrow money for something important?
With so many different types of loans, at varying interest and repayment levels, finding one that suits your financial situation can be daunting.
The loan that is best for you will depend on how much you want to borrow, your credit rating and how quickly you will be in a position to pay it back.
To help you see the wood from the trees, here is a beginner’s guide to all of the loans on offer, and their advantages and disadvantages. Hopefully it will help you make the right decision for you.
Provided you have a good credit history and a reliable income, a credit card can be a cheap and easy way to borrow money. Many of the major banks and credit card providers will offer an introductory period at 0% interest on purchases and/or balance transfers. Be careful, though. After this initial period, interest rates will jump north of 15%, and hefty late charges will be applied if you miss a minimum payment.
Banks offer large loans for longer periods of time to customers with a solid credit rating. They are the best option for larger loans as they offer interest rates as low as 6%, and they give you a lot longer to pay the loan back. Unfortunately, since the credit crunch, it has become very difficult to borrow money from the bank. In order to be accepted, you’ll often have to provide a cast iron guarantor.
A mortgage is likely to be the largest loan you ever take on. It is a loan you take out to finance the purchase of a house or property. Mortgages are the only way a majority of the population are able to own homes. They run for variable terms, but traditionally they’ll last 25 years.
There are two main types of mortgage – fixed rate, where the interest remains the same, or variable rate, where the interest rate varies with the Bank of England rate.
Mortgages are high stakes loans. They are only awarded with the house itself as collateral. There is a lot to lose if you default on payments, so don’t enter into one lightly!
An overdraft is linked to a bank account, and can be arranged through your bank or building society. An arranged overdraft allows you to continue to spend even after your account has reached zero.
If you stay within the arranged limits of your overdraft, you’ll often be offered the loan interest free. This means that you’ll have the peace of mind of knowing that even if you spend a little more than you have, you’ll not get charged.
But if you go beyond those limits, or become overdrawn without an arranged overdraft, you’ll be subject to crippling charges. Typically, you’d be charged around £1 per day on an unarranged overdraft.
Payday loans, as the name suggests, are designed to give you just enough money to tide you over until the next payday. They can be a lifesaver if you have been caught short one month and need a small cash injection to cover the groceries, for example.
You’ll find this type of loan from a payday loans direct lender, rather than a bank, and due to the risky nature of the business, they often charge high interest rates. While payday loans can be a useful cushion, be warned against falling into a cycle of borrowing and debt that could spiral out of control. Always try and stay on top of your borrowing.