Types of Loans and Loans to Avoid

There are many different types of loans on the market so make sure you chose the right one. When looking to borrow money, it’s important that you know your options and you chose the right type of loan. Below are some examples of the different types of loans available and those definitely not to touch!

Open-Ended and Closed-Ended Loans

Open-ended loans – These are loans that provide you with a fixed amount of credit that you can use whenever you like, each time you pay off or pay down the loan you can automatically use it again. A Credit card is the most common types of open-ended loan facility.
Closed-ended loans – Once loans such as these are repaid they are classed as closed or ended. When you make a payment on a closed-ended loan, the amount of the loan decreases. With this type of loan, if you need to borrow more money it is not possible within the existing loan agreement, you would have to apply for and take out a new loan. Common types of this type of loan are property loans and asset loans.

Secured and Unsecured Loans

Secured loans – Are loans that are fixed to an asset as security for the loan. In the event of being unable to repay the loan, the lender can take possession of the security and use it to repay the loan and any interest arrears. Interests rates for secured loans are normally lower than those for unsecured loans, but this will also be dependant on whether the lender has waived the need to take out credit checks or imposed very strict affordability conditions. The security offered might need to be valued to assess its value before a loan can be offered.
Unsecured loans – Do not require any assets to be secured against them. These loans are more difficult to get and will also have much higher interest rates than secured loans. Unsecured loans are assessed mainly on your credit rating and affordability or income. If you fail to keep up payments on an unsecured loan, the lender will use debt collectors and legal channels to recover the debt.

Property Loans

High street lenders such as banks and building societies have traditionally provided these types of loans. These loans are specifically secured by property such as domestic residences or commercial property. Lending by banks and building societies is subject to the new 2014 MMR restrictions and can be hard to come by. There are however, new lenders in the market that can provide property based loans that are not subject to MMR and thus can be provided without the cumbersome red tape. Examples of loans falling outside of MMR are bridging loans and buy to let loans.

Loans to Avoid

The most high profile type of loan in the market place to avoid at all cost is the so-called payday loan. These loans are short-term loans borrowed using your weekly pay as security for the loan. Payday loans have ridiculously high APRs and can be almost impossible to pay off.

Unauthorised Overdrafts

In some instance these can be even more expensive than Pay Day loans. If you don’t agree your borrowing with a bank they will hit you with extortionate interest rates and charges for writing to you, bouncing cheques and so on and so.