A bank loan is borrowed credit in which an agreed amount is provided by a lender, in this case a retail bank. Whether you are seeking a line of credit for a business, or a personal loan to renovate your home, there are a variety of different types of bank loans for different circumstances we commonly undergo in our lives.
It is important to choose the option that best merits the financial situation you are in. It is therefore necessary to take a look at the different types of bank loans used for different purposes.
Secured Bank LoansGetting a secured loan (otherwise known as a homeowner’s loan) might be a good option for you if you’re in need of urgent capital that won’t leave you burdened with high interest payments that are typical from other loans. The rule is, you must secure a physical asset which is valued at or above the amount of capital being borrowed from the bank, such as the equity in your home. One could argue that this type of bank loan is quite daunting as you’re putting your high valued possessions on the line. However, it gives the bank a tangible piece of security (like an insurance policy) to secure your debt, which usually allows you to borrow significantly more cash than through an unsecured loan due to added lender’s confidence. The people reading this article would be asking by now, "when should I get a secured loan"? To answer this question, it is important to understand the circumstances in which this type of bank loan is a good option Are you thinking about filing for bankruptcy? A debt consolidation loan could potentially reduce your monthly outgoings by 50% by paying off all other debts and leaving you with only one repayment. This secured bank loan could help you regain your credit score rating, instead of losing everything and starting from scratch. Another common secured bank loan is a second mortgage. The amount of capital you can borrow depends on the existing equity you own in the property so you can secure that against the debt.
Unsecured Bank LoansUnsecured bank loans typically charge higher interest rates than secured loans. An example of an unsecured bank loan is a ‘short-term’ line of credit. If you need to borrow cash in an emergency due to an unforeseen problem such as a broken down car, then you only need to obtain a small amount of cash. As the duration of the repayment schedule lasts no longer than a few weeks/months, banks charge an average of 45-46% interest on top of the principal amount owed. A short-term bank loan could also be repaid as a ‘pay day’ loan, which means the borrower can pay the final instalment on the day of his/her monthly salary cheque.
How much would a bank loan cost you?The amount of interest charged on top of the principal owed to the bank is dependent on a few variables. For a secured bank loan: (a) the loan amount, (b) duration of repayment, (c) your credit score rating, (d) and the equity (value) you own in your home all determine the monthly debt repayments. Generally speaking, the longer the repayment period the more interest charged, however this still reduces the amount you pay per month as the total amount borrowed is more spread out. On the other hand, short-term bank loan interest rates will always be much more expensive irrespective of the duration of repayment.
Making a decisionWhichever situation is relevant to you, it should be taken into account that banks are more prejudiced in their lending criteria for new and existing customers after the recession. This is especially the case if you want to borrow an unsecured bank loan of £25,000 or more because you are not giving the bank any incentive through collateral, which would otherwise be used in a secured loan option. If you have a low credit score, then it is best to go for the best option with minimal debt by borrowing as less as possible.
If you’re having trouble working out exactly what kind of loan you need, then browse through our guides and we’ll tell you all you need to know.
Loans come in a wide range of shapes and sizes, from secured to unsecured; short term to long term. Picking the right one can be hard, but don’t worry, we’ve got all the information you need to so you can get borrowing in the right way, right away.
MoneyExpert does not give advice on or recommend any particular insurance product or service or whether it is suitable for your personal circumstances. The information provided is to help you to make your own choice about how to proceed