Types of loans

There are literally hundreds of loan providers and thousands of loan deals to choose from which can be off-putting, even for the more financially-savvy consumer. To start simplifying things, here are the most common types of loans:

Payday Loan

A payday loan, or payday advance, is a small, short term loan intended to assist with unexpected expenses until your next payday. Online payday loans can be 100% paperless, however many lenders still require applicant’s to fax in bank statements and paystubs to prove current employment. The loan is paid directly into the customer’s bank account and repayment is deducted directly from the customer’s bank account on the due date via direct debit or debit card payment.

Secured Loan

A secured loan is one in which the borrower pledges an asset, such as a car or house, as collateral for the loan. The debt becomes secured against the collateral, and should the borrower default on the loan, the lender would have the right to take possession of the asset in order to satisfy the debt. In this scenario, the lender would then sell the asset to recoup the money that he lost on the loan.

A mortgage is a secured loan with the property itself used as collateral.

Unsecured Loan

An unsecured loan is also known as a personal loan. This type of loan is given based on the borrower’s credit rating and it is not secured against any valuable asset. Although these loans can be lower risk for the borrower because it’s not secured against an asset, they can also come with a higher interest rate for the same reason.

Consolidation Loan

A consolidation loan allows a person to consolidate or combine all their debts together into one loan. This is often done to get a lower interest rate and/or to have only one monthly payment towards their debt. This is also referred to as “debt consolidation” and it is a common type of loan amongst people with credit problems.

Doorstep Loan

A doorstep loan is a personal loan which is delivered by an agent to your home. Loan repayments are also collected by an agent at your doorstep. Doorstep loans are typically offered to people on low-incomes, single mothers or others who may struggle to qualify for a traditional bank loan.

So which type of loan is best for you? Unfortunately it’s impossible to answer that question because there is no correct answer for everyone. What is important is that you choose a loan that is right for you depending on your individual circumstances and needs.