In-depth Loan Comparison with Our Detailed Guide on Loans
Loans are one of the most evident and vital sources of finance utilised by individuals and businesses. The financial world has thrived along with every other advancement in today’s time, offering you various types of loans in the financial market.
Whether an individual is looking out for a feasible loan option or a business seeking a viable credit opportunity, multiple loan options have made decision-making a complicated task for borrowers. The silver lining to this is how the abundance of different loans can help you make a prudent decision tailored to your needs once you make an in-depth loan comparison and find your perfect match.
This detailed article aims to provide you with proper insights into how loans work and what each type has to offer. With the help of this guide, along with our financial advice, you can find swift and effective financial solutions for your business and improve its overall financial standing.
Let us answer some basic questions first before you compare loans.
What Is A Loan?
A loan is a set amount of money you borrow from a financial organisation like the bank and agree to repay the amount (with interest) over a certain period. Meaning that the amount you pay back will always be greater than the amount you borrow, as the interest rate will depend on the time taken to repay and the frequency of payments.
How Do Loans Work?
The mechanism of loans includes some basic steps, like:
- You will initially have to communicate with the lender or broker, with a financial expert’s help or on your own to begin the process.
- Some primary conditions will be set, including the loan amount, interest rate, and the repayment period (the date you will entirely pay off the borrowed amount).
- The contract will then be signed by both the lender and borrower (you).
- Once your lender approves the plan, the settled amount will be transferred to you through the preferred medium.
- You will then pay back the loan monthly, quarterly, or yearly (principal plus interest) until the total balance is paid off.
Remember that you will have to pay an extra fee on top of the interest if you ever miss a payment, as the amount you fail to pay will be included in the next instalment.
Annual Percentage Rate (APR) VS Interest Rates
In simple terms, the interest rate is the cost of borrowing money where a percentage is charged on the amount borrowed. For example, if Sam borrows £1000 and the interest rate is fixed at 5% per annum, Sam will pay £50 yearly as interest, apart from the principal return.
On the other hand, APR or the annual percentage rate includes the interest rate and additional charges like broker fees, closing costs, mortgage insurance and discount points. In other words, APR is the aggregate cost of credit.
Therefore, indicating that APR will usually be greater than the interest rate. Some lenders exclude certain charges from the APR, and it’s essential to ask your lender which fees are set aside and which are included to compare different lending options reasonably.
Sensible individuals and businesses make a thorough loan comparison before applying for the most suitable loan option, and so without further ado, let’s get into the nitty-gritty of the various types of loans available and see what can fit best for you.
Different Types of Loans
The wide variety of loans available leaves the choice and study of loans to you to find and understand the breakdown of all the types of loans in the financial markets and see how your choice will affect your finances.
Here is a classification of the different types of loans that are sub-classified under the two main categories:
- secured loans.
- unsecured loans
Secured Loans vs Unsecured Loans
Choosing between secured and personal(unsecured) loans can be highly complicated. It is crucial to remember that the wrong loan option could substantially negatively impact your financial well-being. Hence, we have marked the evident and unobvious reasons to make your borrowing decision as convenient and straightforward as possible. You might also want to consider getting the right financial advice from market experts to gain accurate market insights to help you through the process.
Secured loans are identified as loans that are tied up to collateral. Like, a mortgage is a secured loan against your property that the lender can repossess in case you fail to repay the settled amount. The common types involve:
- Homeowner loans: these loans are secured against your property and are merely offered to homeowners.
- Bridging loans: these loans act as a bridge to fill the gap when you require funds to make a payment. For example, you can opt for a bridging loan when purchasing a property but wait for another property to sell-off. The loan acts as a secured loan, meaning that you will only qualify for this type of borrowing if you own a high-value asset such as land or other kinds of property.
- Logbook loans: these loans are secured against your vehicle such that in case of failure to make the full repayment, your lender will retain the vehicle.
- Car finance: You will opt for this loan to specifically purchase a car. Thus, the money you borrow will be secured against your vehicle, and if you fail to pay the settled amount, your lender can seize your vehicle.
- Secured Debt consolidation loans: if you have several existing debts, then acquiring this loan can help you pay off the others like overdrafts or credit card payments. It’s a loan that enables you to combine all your loans into one, making loan management and monthly repayments easy to track. But again, under a secured debt consolidation loan, you will be liable to provide collateral such as your house or car to the lender.
In Contrast, Unsecured loans are not associated with your assets; however, debt collectors are still permitted to take over your possessions if you default on your repayments. The common types involve:
- Personal loans: are an excellent option for individuals looking for a fixed amount at a fixed rate for a specified time. You can get your personal loan from a bank, an online lender, or through a credit union.
- Peer to peer or social loans: if you intend to borrow a loan directly from another individual willing to lend and eliminate the middleman from the process, peer to peer loans may be a good choice. The online platform enables borrowers and lenders to shop around and look for the most suitable opportunities, making peer to peer lending a desirable option for many, especially those with a good credit history.
- Business loans: These loans are designed for business borrowing, the same as personal loans. If you are making this loan comparison for business borrowing, this could be a particular option you can look into.
- Guarantor loans: considering that you have a bad credit history or no history at all, you can get a guarantor loan if a third party known as the ‘guarantor’ takes the responsibility to pay back the loan if you by any chance fail to do so. This depicts that guarantor loans are unsecured in every way but provide lenders with a reliable backup so that the guarantee convinces the lender to loan.
- Bad credit loans: when you have a bad credit history or no history with borrowing, then bad credit loans are a possible option. But these loans come with remarkably high-interest rates, even higher than standard personal loans. This makes bad credit loans a costly option for borrowing, and one must be very careful before opting for such loans.
- Unsecured debt consolidation loans: like secured debt consolidation, here, your loan will act as a personal loan. At the same time, you will not have to provide a specific asset as a security for the loan.
Loans for Individuals vs Businesses
There are different loan options available for individuals and businesses as these loans differ with various factors, including the reason you need a loan and your credit situation.
Regardless of being an individual or business, making a proper loan comparison can help you better understand the implications and liabilities that come with the loan.
Loans for Individuals
Individuals can opt for secured or unsecured loans. As discussed earlier, for a secured loan, you will have to offer collateral for the money you borrow, but you will be able to borrow a large amount of money in return.
If you require a large amount and believe that you will successfully repay the instalments, getting yourself a secured personal loan could be a feasible option. Nevertheless, you will have to let go of your private asset if you default. It is best to undergo a complete CBA with the help of our financial advisors and minimise your borrowing risks while making a loan choice.
Additionally, personal loans can also be unsecured, where lenders solely base their lending decision on your circumstances, current debts, credit score and income to estimate your ability to repay the amount in time.
You can increase your chance of successful borrowing by using a pre-approval loan service. You can enter all your details without altering your credit file and wait until lenders view and approve your loan application.
If you are considering loan options to purchase a car, go for a holiday, make home improvements or any similar personal reasons, a personal loan could be an appropriate choice for you.
Loans for Businesses
Business owners find themselves looking for other sources of finances many times. It could be for paying off debts, new investment plans, improvement in cash flows or expansion objectives. The trouble lies in finding the right business loan to nurture your business and prevent it from going down the hill.
Here we have a valuable guide to navigating the business loan marketplace and help you understand your loan options for profitably financing your businesses.
Business loans can either be secured or unsecured, depending on your agreement and circumstances. Secured business loans expect you to put forward a personal asset as a security for the loan. While this puts your asset at risk if you struggle to repay the loan, businesses tend to get high amounts at lower interest rates due to increased lender confidence. You can go for a commercial mortgage or asset-backed lending when looking for secured loans as a business owner.
Then again, an unsecured loan does not require any collateral in exchange for a loan. In this case, lenders will make a thorough credit and affordability check to ensure repayment safety. It is best to know your picks as a business owner to make a prudent judgment. It’s vital to note that you have nothing to worry about business loans regulations if you are a sole trader. However, if you run a limited company, you might as well consider business loan regulations coming your way when making your choice.
Here are some of the main types of unsecured business loans that you can contemplate when making a loan comparison:
- Bank loan: if you run a well-established business with a solid credit history, high street banks can lend you loans.
- Short-term loan: the opposite of long-term loans, which means that you can easily avail of them but are offered for shorter periods with high-interest rates.
- Alternative business loans: alternative lenders and many online banks offer business loans through online platforms, and their main conditions like terms, rates and eligibility criteria differ from lender to lender.
- Invoice financing: this involves the selling of unpaid invoices to a financer who, in exchange, makes an amount available to the business.
- Peer-to-peer lending: just as mentioned above, your business can seek loans from the public lending community.
- Lines of credit: your business can take a credit limit and withdraw any amount whenever needed, and the interest will only be charged on the balance you owe.
- Merchant cash advances: also known as business cash advances, are business loans that are automatically repaid when you take a card payment from your customer. Merchant cash advances offer finance to businesses with a poor credit history; therefore, you can always consider this option if you find yourself in a low margin.
What Type of Loan Is Right for You?
Having gone through the various types of loans available in the marketplace, you may be overwhelmed with the number of options. But when you consider your requirements and circumstances closely to narrow down the possibilities, you will gradually come to a possible conclusion but not before answering a set of questions for yourself.
It is best to do your research and gain expert financial advice on top of it to financially plan and estimate the best type of loan for yourself, or you can consult a credit broker to find you a lender.
Here are a few fundamental questions you will need to answer before you make your decision.
Where Can You Acquire Loans in the UK?
There are sufficiently a variety of places to secure a loan in the UK. Some of the primary providers are:
- High-street banks
- Building societies
- Peer to peer websites
- Credit unions
- Secured loan providers.
- The government
It is always practical to explore and make a fair loan comparison and find a loan provider who offers you the best deal according to your circumstances.
Do You Qualify for A Loan?
You will have to qualify to get a loan from any of the sources mentioned. Apart from the logical rule of being at least 18 years old, you must:
- Be a UK resident along with proof of address.
- Pass a proper lenders credit check.
- Provide your lender proof of your income.
Your lender will only agree to loan you an amount if you have enough proof to show them that you will be competent in repaying the loan. Your credit score plays a huge role here because your potential lenders will determine your risk level through this score. Reasonably, improving your credit score could help you qualify for better loan options, as with a high credit score, you can be eligible for loans with lower interest rates.
What Is the Importance of Your Credit Score?
Before any lender offers you a loan, you will pass through a proper credit check. This could either be your credit score or credit rating. While many people use these terms interchangeably, it is crucial to understand the slight difference between these terms.
A Credit score has a numerical holding which depicts an individual or small business’s creditworthiness. On the other hand, a credit rating involves a letter (A, B) that indicates the creditworthiness of a company or government. Both depict the borrower’s standing and significantly impact the loan application. Hence, your credit history will guide lenders in making their decision. Bear in mind that to have a good credit score/rating, you will need to:
- Pay your bills on time.
- Make your credit card payments promptly.
- Borrow very carefully.
- Repay your debts timely.
Once you realise how essential credit responsibility is how it can affect your credit score, it can haunt you later while opting for loan options, you will make sure to take enough care of your credit rating. Even the most minor slip-ups can ruin your credit report and stick around for long.
Moreover, you can always opt for bad credit loans if you have a poor credit history and improve your credit score to qualify for better loans in the future. We recommend reducing your credit holding and improving your financial health with the help of expert financial advisors so that you can take your loan decisions wisely.
The Application Process for A Loan
The application process must be carried out carefully. You can generally apply for a loan online, by phone, post or via your bank by personally visiting the branch, and you will be required to provide some essential details to complete the documentation, like:
- Bank details (recent bank statements as proof of earnings)
- Employment details
- Personal information
- Previous and current address.
If you are self-employed, you will require a year’s audited accounts to apply for a loan in the UK. conditions may vary depending on the lending source or lender type, as they may sometimes ask for more details and sometimes less. So make sure to verify with your lender whether they need anything else like the P60 or any other official document before you apply for the loan; this practice can save you time and reduce the possibility of rejection.
How Much Loan Amount Can You Borrow?
If you pass your lender’s affordability criteria, here is how much you will be able to borrow for each type of loan:
You may as well borrow up to £50,000 if you speak to a professional advisor and have a suitable financial plan.
How Long Do You Need to Repay the Loan?
Making a thorough loan comparison between the borrowing terms of different loans, here is how long you will need to repay for each type of loan:
Can You Overpay or Pay Off Your Loans Early?
Paying your loan early can take you to the path of freedom from debt sooner than expected, but some lenders penalise their borrowers on early repayment by charging an early repayment charge (ERC). The ERC acts as a fee for early settlement and is generally the highest when you overpay the earliest.
If you can afford to pay back your loans before time, it is best to explore around and apply with a lender who won’t charge early repayment penalties so that you can save up on interest payments.
The Pros and Cons of Getting A Loan
Loans have helped individuals and businesses cope with their financial crises, but this does not purely indicate that borrowing has no setbacks. A heavy debt portfolio can be exceptionally critical so let’s also look into the boon and bane of securing a loan so that you know exactly where you’re heading before finalising your borrowing preferences.
- Loans offer fixed interest rates.
- You have many borrowing options and can borrow money (in large sums).
- The application process may sometimes take less than 2 days.
- Loans are preferable to long term borrowings.
- Your assets are at risk.
- Most lenders offer inflexible payment options.
- Mostly, a good credit score leads to favourable interest rates.
- Lenders may charge early repayment penalties.
How Will the Consumer Credit Act Protect You?
The Consumer credit protection act (CCPA) is an important law that sets out numerous rights to protect borrowers in terms of their financial lives. The show enforces safety for credit customers from when your lender approves your application. In case of failure to repay or against any unfair debt collection practices, the CCPA protects its consumers and grants a cooling-off period where you can rethink your loan decisions and gain protection.
It’s essential to recognise your rights so that you can protect yourself from any unfair or incompetent practices from your lender. You can also submit a complaint against your lender if such circumstances apply or seek professional advice and discover what to do next.
How Can a Financial Advisor Help?
Hiring a financial advisor can help you set a proper budget and guide you to handling your debt more precisely. They are experts in managing finances through efficient investment management solutions and estate planning services to help you grow your business in the future. Also, assisting you with evaluating how much you can afford to borrow and how fast you will be able to repay the loan. It’s preferable to consider a financial advisor when making a thorough loan comparison to strategise better and eliminate your financial risks.
Jinesh is a Senior Business Accountant, with a masters in Finance from Westminster University, and specializes in tax and accounting for small to medium businesses with a turnover less than £ 3 Million.
He specialises in helping creative businesses understand and manage their accounting and tax needs and obligations.
As accounting ecosystems evolve, their potential to add value also grows. This has increased the focus on digital solutions to tackle complex business problems. Jinesh helps businesses see the opportunity in this and helps businesses become more efficient and increase performance, using the right solutions.
Some of the key things he focuses on are:
- Helping businesses gain insights from their business data
- Providing complex tax and accounting solutions
- Helping businesses prepare for complex industry developments and changes