From the age of 18, anyone in the UK can apply for credit or take out a loan, and at some point or another, most people will do so. The reasons people borrow money vary. Some require student loans, others want to purchase a new home, car or household appliances. Others still borrow to help them out of a sticky financial situation or to take a dream holiday. Different purposes are catered for by different types of a loan. Here are some of the most common loan types (as described by the Money Advice Service) and what they are most suitable for.
Types of Loan
Each form of loan will incur interest charges. These charges must be displayed by loan companies in the shape of APRs (annual percentage rates). The following loan types are listed in order with the highest APR at the top and the lowest at the bottom.
Payday Loans – Designed to assist with financial emergencies, a payday loan is typically taken out for periods of no more than 30 days. Carrying very high APRs, these loans should not be taken out lightly, as missed payments can incur equally high penalty fees. Repaid promptly, they can, however, be extremely helpful and could even turn out less expensive than other loans in the long run.
Store Cards – Similar to credit cards, these cards can only be used in certain stores. Less flexible than general credit cards, they also carry higher APRs.
Credit Unions – Set up by members, a credit union is typically a small financial organisation that aims to support local communities with loans usually not exceeding £3,000. The APR for members is limited to 42.6% by the law.
Credit Cards – These cards can be used for any kind of purchase. Users receive monthly statements detailing their borrowing and have a choice of paying the balance in full or part thereof. The minimum payment that has to be made is usually 5%. Any outstanding balance incurs interest, which is added to the statement the following month. Making minimum payments can significantly increase both the length of time it takes to repay the borrowed amount and the total to be repaid.
Overdraft – Banks often allow account holders to draw out more money than they actually have in their account. Designed to be an extremely short-term type of borrowing as the overdraft will be reduced (or may even be cleared) the next time money goes into the account, this facility is often offered on an interest-free basis. It should, however, be noted that getting an overdraft without the bank’s permission may incur extremely high charges.
Taking out loans of any kind is a commitment that could, if not handled responsibly by both lenders and borrowers, lead to serious financial difficulties and bad credit ratings. It is therefore necessary to carefully consider which type of loan is most suitable for your purpose. More importantly, it is vital to ensure that you will be able to make repayments on time before taking out any loan, as failing to do so could result in ever increasing debt that will become more and more difficult to get out of. Call Uncle Buck for more helpful advice today on Tel.: 01959 543 400 (Call charges may vary depending on your phone provider. Calls may be monitored for security and/or training purposes).