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How To Determine the Type of Loan You Need



Taking the time to determine the type of loan you need and choosing the correct loan from the many that are available can make your borrowing less expensive, simpler to handle, and much less risky. Read on to find out how to choose the best loan out of the different loan types you might be able to get.

Why Do You Need to Borrow?

Before you can go too far down the application route for a loan, you’ll need to have a good idea of exactly why you need to borrow money in the first place. Knowing this will help you narrow down your loan options and give you a much better idea of which type of loan you really need.

For example, the kinds of loans available to go on vacation will vary from those available to purchase a vehicle or your first house (although this will also depend on the lender and how much you need to borrow). With this in mind, some of the things you may need a loan for could be:

  • Buying a car
  • A mortgage for a property
  • Debt consolidation
  • A large item purchases
  • A vacation
  • Home renovations
  • Starting a business

Each reason is perfectly valid, but not all of them will be the same in the eyes of a lender. A business startup loan is not the same as a personal loan, for example, and a mortgage is very different from money borrowed to buy a car. When you know what you need, you’ll have a better idea of the loan you need too.

What Loans Are There?

Although there are different categories of each loan, there are two main types of loans to think about. These are unsecured and secured.

Unsecured loans are those that you don’t have to offer any security, such as your house or an asset. Instead, you borrow a lump sum and repay it in predetermined payments over a certain time period. Secured loans are those that have an asset connected to them. If you are unable to repay the debt, the bank or the loan provider may repossess and sell the asset to recover the amount. You can find out more about how to protect yourself and your property from


If you have a choice, go with an unsecured loan since it does not immediately put your possessions at risk if anything goes wrong. However, bear in mind that a secured loan is often less expensive in terms of interest, and therefore, if you’re sure you can pay the loan back, this could be a good way to save money. It is a risk, though, and one you’ll need to think carefully about.

Other Borrowing

As well as the two types of loans mentioned above, there are other forms of borrowing that you might want to consider.

A car loan comes in a few different types. The first is the previously stated kind of personal loan. The other three are just for cars. They are:

Hire purchase: In this case, the loan is secured against the vehicle, which means you can use it while making monthly payments, but you don’t own it until the final payment is made. If you fail to make any payments, the vehicle will be repossessed. Some hire buy programs may demand a deposit, with monthly payments covering the remainder of the cost.

Personal Contract Plan (PCP): A PCP may also need you to pay a deposit, and at the conclusion of the agreement, you can either pay a lump amount to buy the vehicle, return it, or trade it in for another car. As you never own the vehicle throughout the repayment period or afterward, you won’t be allowed to sell it, and you must adhere to a set mileage restriction.

Lease: A lease entails paying a set sum each month to use a vehicle within a certain mileage limit, and it ends with you returning the car. Maintenance is typically included in the monthly fee, and the price varies depending on the vehicle.

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A mortgage is a loan that is needed when you want to buy a house. It may come from a bank or building society, or it could come from a mortgage broker who looks for the best offer for you. When you apply for a mortgage, the lender will consider your credit score, income, and expenses, as well as your deposit and the amount the property is selling for. They will then decide on the loan’s conditions, such as the interest rate at which you make installments and the amount of time you have to repay the mortgage.

A credit card is a method of borrowing money that you repay monthly. Borrowing money usually entails paying interest, although certain credit card issuers and lenders advertise zero-interest periods in some cases. This will depend on many factors, and your credit score and rating may influence the kind of credit you can get. Credit cards can also provide a variety of advantages. For example, they provide security for purchases made with the card, for example, and some cards allow you to combine any other debt into a single payment. However, because there is no set endpoint, you’ll need to think carefully about the overall affordability of this kind of borrowing.

There are also payday and short term loans. These loans are useful if you only want to borrow a small amount of money for a short amount of time – for example if you have a fginancila emergency and you don’t have the funds saved up to pay for it.

Bear in mind that the APR’s are much higher than other borrowing as the term is so short. These sorts of loans have had a negative history but as long as they are used to the right purpose and managed correctly they can be extremely useful. According to credit broker CashLady, “[payday loans] are a valuable loan product that helps customers who may be unable to acquire a loan from a mainstream lender, quickly and safely access credit when necessary”.

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How Long Do You Need?

Most unsecured loans have durations ranging from one to seven years, although other loans have shorter and longer payback periods. If you need to have more time to repay your loan, some secured loans have periods of up to ten years.

If you want to repay the debt sooner, some peer-to-peer loans are just for a year, and many have no early repayment penalties. On the other hand, bridging loans are intended for short-term financing if you need to borrow a significant amount.

Consider how long you want to be in debt, as well as how much you can actually afford back each month. The sooner that you pay off the debt, the less interest you will pay and the more money you will save.


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