The Types, Their Benefits and Making the Right Decision

As the saying goes, everybody needs some money sometimes.  When it is difficult to make ends meet through normal employment or if you happen to require short-term liquidity, a loan is often the best and only option to consider.  However, these vehicles are still a very real financial commitment and you need to be aware of your responsibilities in advance.  Let us therefore take a quick look at some of the most common loan types as well as the principles to keep in mind so that you can better appreciate their mechanics.

Loan Terminology

There are a few phrases which will help you understand how a loan functions.  The principle is the amount of money that you initially borrowed.  The interest is a percentage that lending institutions charge.  The combination of these two is known as the balance.  If you fail to fulfil your obligations to the loan agency, this is known as a default.  As a result, your credit score will suffer and it will be much more difficult to be approved for another loan in the future.

The Types of Loans

The most common type of loan is a personal loan.  Based upon your credit rating as well as any collateral that might be necessary (such as a home or a car), you can be approved for thousands of pounds or more.

Small business loans are intended to provide you with the necessary capital to fund a start-up organisation.  These vehicles work in the same way as personal loans although it is not uncommon for larger amounts to require a cosigner with good credit.

Payday loans are a third option and these are often used by those with poor credit who would have otherwise been turned down by other financial institutions.  Payday loans only require that you are currently working and are able to provide proof through evidence such as a pay cheque (hence the terminology).  While these can represent sources of quick cash, the amount available rarely exceeds one or two thousand pounds.

Choosing the Right Loan and Other Tips

Loans can provide you with extra liquidity or they can place you in a financial bind.  This is the reason why you need to consider all of your options before committing to any type of formal contract.  Furthermore, be absolutely certain that you will be able to pay back the money (including interest) within the predetermined time frame.   Only take out the amount that is required and never use the money for any other purpose than which it was originally intended.   Finally, take a look at some of the top providers in order to compare and contrast the different services that are offered.

Please keep in mind that this is only a quick guide to understand loans and their basic principles.  It is always wise to speak with a professional financial adviser in order to further understand your options as well as other in-depth mechanics that have not been covered here.