If you need to lay your hands on some money, securing a loan is the obvious solution. However, there are so many borrowing options at your disposal, how will you know which is the right one?
To decide that, you need to evaluate how much money you need, what it is for, and how each loan works. Make an informed choice that is within your financial means and suits your needs.
Here are some different forms of loans to consider:
Payday loans
If you need to lay your hands on a relatively small sum of money and repay it in full within a couple of weeks, a hassle-free payday loan from a reputed firm might suit your needs. A payday loan works like an advance on your next pay cheque. When you take out such a loan, you access funds quickly and then make repayments from your pay cheques when they are deposited into your account.Lenders offer different rates, which affect the repayment amount. You also have the option of utilizing online lenders that require little paperwork from you in the application process. This is ideal if you have a poor credit history and are struggling to get a loan from a more traditional institution.
By directly approaching a lender, you might be subjected to a credit check and must supply documentation to prove your age, income, and current financial status. The process is very swift, and the money could be in your account within minutes provided you supply your lender with complete, correct documentation.
Personal loans
A personal loan is for a much larger sum of money than a payday loan. Most people take out personal loans to make significant purchases or pay off outstanding debts. Most banks offer personal loan facilities, but the application process can be more rigorous. A bank wants to establish that lending you some money will be a low-risk transaction.
A personal loan is unsecured, meaning that it requires no collateral. However, applicants must demonstrate that they have sufficient income to meet their repayment commitments.. A bank will run credit checks to ensure you are a sound investment. Due to a personal loan’s unsecured status, interest rates might be higher than other bank loans.
During the application process, you can decide the period over which repayments will be made, which is usually between one and seven years in the UK. Most banks process personal loan requests quickly, and the applicant will receive an answer regarding the status of their application within a few working days.
Credit card
A credit card works on the principle of a personal loan. Your credit limit is a preapproved limit the bank is prepared to offer you. Each time you use a credit card, it is a commitment to use some of this personal loan on the understanding that it must be repaid to the bank.
Monthly interest is charged on the amount spent on a credit card unless it is paid off in full right away. These interest rates are also higher than other loans because a credit card functions as an unsecured loan, much like a personal loan. In the UK, average credit card interest rates are over 20%.
A credit card’s revolving debt means that its user can make repayments and then borrow the money again, provided they do not exceed their allocated credit card limit. Credit cards are quick and easy to use, and surprisingly easy to obtain. However, they present a financial risk for these very reasons. Continuous or irresponsible use of a credit card means that the end of the debt is never in sight.
If it is cash you need, you can take a cash advance from a credit card, provided there are funds available. This works exactly like swiping a card instore, with the same repayment structure, terms, and conditions.
Homeowner loans
Homeowners can access a loan by borrowing against the house’s equity. This is a secured loan, and a lender should bear in mind that non-payment can result in repossession. A home’s equity is calculated according to what portion of the value of the house you own while considering your outstanding mortgage balance.
By subtracting your mortgage balance from your home’s market value, you can get a good idea of the equity against which you can apply for a loan. Equity increases each time you pay your mortgage, and when property prices in your area rise.
The advantage of a homeowner loan is that borrowers have 1-35 years to pay it off. While interest is payable on this loan, it is much lower than that of an unsecured loan. A homeowner loan can be as little as £1,000 and extend to more than £2 million.
