What is a Loan?

IF YOU HAVE never secured a loan before, you might be unsure of how the process works or the best options for your needs. While they can be financially helpful, they can also lead to monetary issues if you fail to choose wisely.

To ensure you don’t make a big financial mistake, you must gain a thorough understanding of the process.

Find out more about the different loan options available and their pros and cons, which could help you to make an informed choice.

An Unsecured Loan
There are two types of loans you can receive in the UK: an unsecured loan and a secured loan.

Unsecured loans allow you to borrow money from a lender, and you’ll make repayments over an agreed term. However, you cannot use your belongings as collateral when submitting an application.

An example of an unsecured loan is a personal loan, which will allow you to use the money on anything, such as:

The amount you receive will be determined by your income and credit history. The downside is the repayments are often much smaller and are spread out over a longer period of time, which can lead to a higher interest rate in comparison to secured loans.

Other examples of unsecured loans include:

  • Peer-to-peer loans (A service that matches individuals or businesses with borrowers)
  • Guarantor loans (A loved one accepts financial responsibility for a loan if you cannot repay a debt)
  • Bad credit loans (Higher interest loans for people with a poor credit history)
  • Debt consolidation loans (A loan to consolidate multiple debts into a more affordable repayment option)

To manage your finances wisely, get in touch with Castle Finance for financial planning assistance.

A Secured Loan
Alternatively, you have an option to take out a secured loan, which will require you to use your belongings for financial security against the amount borrowed. For example, you might use the following as collateral:

  • Your property
  • A vehicle

Using your belongings as collateral will provide a lender with peace of mind, as they will have a legal right to sell the item if you fail to repay a loan.

What’s more, unlike with unsecured loans, they are more likely to feature various financial restrictions. For example, you can only use a bridging loan to buy a property.

Other common examples of a secured loan include:

  • Homeowner loans (Debt secured against a property with equity)
  • Logbook loans (A loan amount secured against a vehicle)
  • Vehicle finance

Which Option Should You Choose?
A loan should only ever be taken out if it is your only option. While a secured loan will minimise a lender’s risk, a borrower would be wise to pick an unsecured loan, as your home, car or another expensive belonging will be at less risk if you’re unable to make a debt repayment.

How Much Can You Borrow?
It is typical for unsecured loans to range from £500 to £25,000, and borrowers commonly need to repay the loan and any associated interest within one to seven years. There are, however, shorter and longer terms available.

If, however, you need to borrow a larger amount, a secured loan might be your best option, as the loan sums are often much higher. The borrowing terms can also typically range from 6 months to 25 years.



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