Warning: Late repayment can cause you serious money problems. For help, go to moneyhelper.org.uk. We are a credit broker and not a direct lender.

What Are Loans - A Complete Guide

What Are Loans - A Complete Guide

Listen to this article

Sometimes, we need more money to buy things we want or need. This could be a new car, a house, paying for education, or even covering an emergency. We can borrow money from a lender like a bank or financial company in such situations. This process of borrowing money is called taking a loan.

How much would you like to borrow?
£ 500

A loan involves three main parts - the amount you borrow (called the principal), the interest rate (the extra money you pay to the lender for borrowing), and the loan term (how long you have to pay the loan back).

It's important to approach borrowing with caution. Remember, taking out a loan is a responsibility, and it's crucial to ensure you can meet the repayment terms. Loans should not be seen as a long-term solution to financial difficulties.

Types of Loans Based on Security

Types of Loans Based on Security

There are two main types of loans based on whether you need to provide security (something valuable that belongs to you) to get the loan:

Secured Loans 

With a secured loan, you must pledge some asset or collateral to the lender. This could be your house, car, jewelry, investments, etc. If you can't repay the loan, the lender can take your pledged asset to recover their money. Secured loans usually have lower interest rates.

Unsecured Loans 

For unsecured loans, you don't need to provide any collateral. The lender approves your loan based on your credit score, income, and other factors. Unsecured loans tend to have higher interest rates since there is more risk for the lender.

Understanding the difference between secured and unsecured loans is vital. Secured loans may offer lower interest rates, but they come with the risk of losing your collateral if you cannot repay. Always consider your ability to repay the loan to avoid potential financial hardship.

Loan Types Based on Purpose

Loans are also categorized by what you need the money for:

Education Loans: To pay for tuition fees, expenses for school/college, or other education costs.

Personal Loans: For personal expenses like medical bills, weddings, vacations, debt consolidation, home repairs, etc.

Vehicle Loans: Specifically for buying a new or used car, truck, motorcycle, etc.

Home Loans: To buy a house, apartment, or land, as well as the construction costs for building a new house.

Types Based on Collateral

Gold Loans: You give the lender gold jewelry or gold assets as security to get a cash loan.

Loan Against Property/Assets: Similar to gold loans, other valuable assets like property, insurance policies, provident funds, etc., are used as collateral.

Factors Lenders Consider for Loan Approval

Credit Score

Based on your borrowing history, your credit score shows your reliability at repaying debt. Lenders are more likely to approve loans for people with good credit scores.

Income and Job Stability

Lenders want to see you earn enough steady income to repay the loan quickly every month. They'll ask for proof of income, job, self-employment details, etc.

Existing Debt Burden

Too many existing loans can make you a high-risk borrower if your income already goes towards those debt repayments. Lenders calculate your debt-to-income ratio.

Collateral Value

For secured loans, lenders will assess the value of the collateral you're providing. Higher-value collateral means lower interest rates.

Down Payment Amount

Putting down a higher down payment amount shows the lender you are committed and can lower the loan amount they need to provide.

Loan Features and Benefits

●    Quick loan disbursal processes, sometimes even instantly.

●    Flexibility in choosing the loan amount and repayment tenure.

●    Options for secured or unsecured loans.

●    Need to provide collateral to get loans.

●    Earn interest on loan repayments reported to credit bureaus.

●    Prepayment is allowed (sometimes with charges).

●    Can improve credit score with timely repayments.

Eligibility Criteria for Loans

●    Minimum credit score requirement (often 600+).

●    Age between 23-60 years.

●    Steady income source.

●    Existing investment/assets.

●    Good credit history.

Common Loan Documents Required

Common Loan Documents Required

For Salaried Applicants:

●    Loan application form.

●    Identity and address proofs.

●    Bank statements.

●    Salary slips.

For Self-Employed:

●    Business proof documents.

●    Income tax returns.

●    Profit/loss and balance sheets.

●    Personal and business bank statements.

Using a Loan EMI Calculator

A loan EMI (equated monthly installment) calculator helps estimate your monthly loan repayments. Just enter:

●    Loan amount.

●    Interest rate.

●    Loan tenure.

The calculator will show your monthly EMI amount and total interest payable over the loan term.

Lenders assess various factors to determine your eligibility for a loan, highlighting the importance of maintaining a good credit score and stable income. However, meeting these criteria does not guarantee loan approval, and you should carefully consider your financial situation and the need for a loan.

How to Apply for a Loan

1.    Check your eligibility as per lender criteria.

2.    Decide the loan type and amount you need.

3.    Compare interest rates from multiple lenders.

4.    Prepare all required application documents.

5.    Apply online or at a bank branch.

6.    Submit documents if requested by the lender.

7.    Wait for approval and loan disbursal.

Quick Loans and Online Options for Bad Credit

While traditional loans from banks can take weeks for approval, many modern online lenders offer much faster loan disbursal if you need cash urgently.

These quick loans are beneficial if you have a bad or no credit history, as they have more relaxed eligibility criteria than banks. Getting an online loan for bad credit is often the easiest way to access funds fast when you need help to qualify for regular loans.

However, quick loans have significant downsides, like higher interest rates and fees. The tradeoff is getting easy, near-instant approval at the cost of paying more versus a traditional loan. So, while not ideal for large loan amounts you'll repay over the years, quick cash loans can provide fast relief for temporary financial crunches until you get back on your feet.

While quick loans or loans for bad credit can provide immediate financial relief, they often come with higher interest rates and fees, making them a costly option. Always explore all other financial options before considering these types of loans.

Exploring Loan Options for Bad Credit

If your credit score is poor and you can't qualify for a personal loan from a bank, here are some standard online quick loan options to consider:

⮚    Quick Loans

Quick Payday lenders give small, short-term cash loans (usually £500 or less) in exchange for providing your upcoming paycheck details and agreeing to repay the total amount plus fees once you get paid. Exceptionally high interest rates, but money disbursed in 1-2 days.

⮚    Credit Card Funding

Those with poor credit may still qualify for subprime credit cards from issuers like Continental Finance and Indigo. These have low limits but let you access a revolving credit line in a pinch when desperate for funds.

⮚    Cash Advances and Title Loans

For very bad credit scenarios, lenders will give cash advances based on collateral like paychecks, car titles, or valuable jewelry and watches, without credit checks but with exorbitant interest.

If you're considering a loan due to poor credit, it's essential to understand that while options exist, they come at a cost. High APRs and fees can exacerbate financial strains. Consider seeking financial advice or exploring alternatives.

When to Consider Online Loan For Bad Credit

When to Consider Online Loan For Bad Credit

While fast cash options should be absolute last resorts due to their high costs, they can provide critical stopgap funding for urgent financial fires like:

⮚    Paying rent/mortgage to avoid eviction.

⮚    Emergency medical, home, or car repair bills.

⮚    Utility cut-off or bankruptcy prevention

⮚    Dealing with income disruptions from job loss.

In crises where affordable loan options are non-existent, yet cash is needed within days to prevent worst-case scenarios, the heavy interest rates on quick loans can sometimes be a necessary evil.

The Bottom-line 

Borrowing money always comes at a price in interest paid back to the lender. Being smart about loan types based on amounts needed, repayment timelines desired, and overall credit profile can ensure you get the funding you require at the best rates possible.

Just remember - loans are meant to be temporary funding solutions, not permanent crutches. Have a solid plan to repay money borrowed to regain financial flexibility and peace of mind. Get trapped in a spiral of increasing debt, and those short-term loans for dire credit needs can quickly become long-term financial nightmares.

This blog is intended for informational purposes only and should not be construed as financial advice. The details provided aim to educate and inform readers about various aspects of borrowing and loans. Financial decisions should be made based on your personal circumstances. We encourage all readers to conduct their own research and, where necessary, seek professional advice before entering into any financial commitments.

"Warning: Late repayment can cause you serious money problems. Always consider if borrowing is the right option for you and ensure you can repay your loan." For help, go to moneyhelper.org.uk.

Apply for a Short Term Loans
£ 500

Our Lenders

Matching you with the right lender

We are not a lender or loan provider, we are a credit broker and showcase to you a wide range of lenders and match you with your financial needs. We offer you No Guarantor Loans, Debt Consolidation Loans and Bad Credit Loans by customizing them and helping you have good financial stability.