What Are The Different Types of Loans?
By TOI Staff November 1, 2022 Update on : November 1, 2022
If you’ve ever considered taking out a loan, then you’ll know that deciding which type you need can be difficult. Your personal circumstances, your requirements, and your ability to get credit on short notice can all affect the type of loan you’re looking to take out, so it’s important to be fully informed before you embark on the journey of applying for your very first loan.
Whether you’re applying online or in person, being armed with the knowledge you need is critical. Here’s our guide to the different types of loans out there and what they might mean for you.
Online vs offline loans
The first crucial difference you need to understand when it comes to loans is that of online versus offline options. Loan providers will either allow you to sign up online or they’ll require you to visit a physical branch in order to complete your application.
Naturally, online loans are much easier to apply for, because you don’t actually need to leave the comfort of your home; you can complete the application entirely from your living room or even your bedroom. However, there are many, many more online loan providers than there are offline options, so it’s important to research the company you’re applying with thoroughly before you proceed.
Unsecured vs secured loans
Beyond the place you apply for the loan, the most common division you’ll see is that between unsecured and secured loans. To put it simply, unsecured loans don’t have assets secured against them, while secured loans, as you’ve probably guessed, do. For example, mortgage loans would fall under secured loans, because they’re usually secured against the value of your home.
Unsecured loans usually grant less cash, but they also have fewer strings, so they’re a good option if you don’t need a massive cash injection. Secured loans, by contrast, are riskier, but usually allow you to borrow more, so it’s all about your personal preference in this regard.
Short-term vs long-term loans
Of course, loans also come in various different terms, allowing you to pay back the amount you borrow over different periods of time. Naturally, the shorter the term of the loan, the higher the interest; while this isn’t always necessarily the case, it’s a good rule of thumb to abide by. That means you should only consider taking out a short-term loan if you desperately need the money and if you know you’ll be able to pay it back.
By contrast, long-term loans allow you to spread payments over longer periods of time and usually have smaller interest additions. However, that obviously means you’ll be paying back the loan for longer, so bear that in mind too. As always, make sure to discuss this closely with the company you’re applying for the loan from.
One specific type of loan you might come across is a loan secured against your vehicle. You may find that this kind of loan allows you to buy a new vehicle using the payments you’re making against it, or you may find that the loan lets you borrow a sum of cash with your vehicle as the collateral. This is a surprisingly common type of loan, so there’s a good chance you’ll encounter it while you’re shopping around for the best loan deals. Make sure that you consider it carefully before you apply, as always.
Another kind of loan you might encounter on your travels is a credit-building loan. These can either come as loans or credit cards, and they specifically aim to build your credit rating rather than giving you a cash injection in return for repayments. They work a little differently to regular loans; you’ll usually receive the amount you pay into them at the end of the process rather than at the start.
Whether you take out a card or a conventional loan, you’ll pay a small amount towards the loan each month. Lenders and credit suppliers like to see that you’re capable of making regular repayments on a loan; in this way, taking out a loan can actually help your credit rating (provided that you make regular and prompt repayments, of course).
Debt consolidation loans
Back in the 90s and early 2000s, TV adverts were overrun with companies promising to “consolidate your existing debts into a simple monthly repayment”. You might remember those ads as being particularly inescapable, but the fact is that they had a point. Debt consolidation loans can be a good way to accrue lots of different debts into a single place, allowing you to pay them all back with one simple interest rate.
Debt consolidation loans aren’t always a good idea, so you need to make sure that you’re making the right decision before you commit. The last thing you want is to end up paying more than you need to because you made a hasty decision, after all.
Fixed rate vs variable rate loans
This is a very important distinction, and it’s one you’ll want to memorise before you start applying for loans. Fixed rate loans, as the name suggests, have a fixed rate of interest that won’t change or fluctuate as you pay them back. Variable rate loans, by contrast, may change their interest rates depending on various factors decided by the lender. It’s definitely a good idea to discuss the interest rate on your loan before you take it out; ask your lender what kind of rate the loan carries and whether it’s negotiable or not.