There are many different loans available in the UK. It can actually be quite confusing knowing which type of loan might be the right one for you, particularly if you do not know what is available. Below is a list of the main types and a description of each so you can learn more about them.
Student Loan/Career Development Loan
A student loan is not really a loan as it works very differently. It is given to cover the cost of a undergraduate degree and only has to be paid back once the graduate is earning over a certain threshold and is written off after thirty years. This means that some graduates pay nothing back, some pay it all back, depending on earnings. The repayments are taking in the tax code.
A career development loan is also used for a course, perhaps a second undergraduate degree or a postgraduate or professional course. Although, like with a student loan, repayments do not start until the course ends, they work like a standard loan and have to be made each month until the loan is repaid, regardless of the earnings of the borrower.
A mortgage is only issued to cover the cost of a house purchase. It is such a large loan that borrowers are normally expected to show that they can save a lump sum, known as a deposit, towards the cost of the house. Monthly interest payments are made and most borrowers also make monthly repayments, although with some mortgages the amount borrowed is just repaid when the loan term is over. Mortgages normally last from 20-30 years and the interest rates tend to be fairly low. If you cannot keep up with the payments then it can lead to the property being repossessed.
Credit Card/Store Card
Credit cards are issued by banks and store cards are issued by shops but other than that they are very much the same. You can use them to purchase items and then just need to repay them once you get a bill at the end of the month. You can repay them in full and get charged no interest or just repay a minimum amount specified by the card issuer and then get charged interest on the remaining balance. The interest rate on these tends to be pretty high.
An overdraft is often offered as part of a current account. It allows you to spend more money than you have available in your account. You will have a limit which is determined by your bank and if you borrow up to that you will be charged a certain interest rate and possibly a one off charge as well. If you borrow more than you are authorised to, you will get charged very much more, both in interest and fees. An unauthorised overdraft can be one of the most expensive ways to borrow money. An overdraft is automatically paid off when money is paid into your account.
Pay Day Loan/Short Term Loan
A pay day loan or a short term loan enables borrowing of fairly small amounts of money, usually less than £1000. Even those with a poor credit record can often get accepted for a loan like this and this means that interest rates are high due to the risk the lender is taking. They can also be arranged very quickly which is appealing to those who need money in a emergency and do not have time to wait for a conventional loan. The loan usually has to be repaid in full, including interest, on the pay day of the borrower. A direct debit is set up to make sure this happens. However, if there is not enough money then there will be charges made by the lender.
A personal loan is issued by a bank or building society. It tends to be for £1000 or more and there will be monthly repayments to be made. The interest rate on these loans tends to be fairly competitive but because they are repaid over a fairly long term, such as five years, then the total amount of interest repaid in monetary terms can be quite high, depending on the specific term and how much money is borrowed.
Car Loan/Vehicle Loan
These loans are taken out to cover the cost of a purchase of a vehicle. They tend to be issued by car sales companies. The interest on them can sometimes be high, although some even have interest free options. Repayments will be made monthly over an agreed term; usually a number of years, which will be higher if more money is borrowed. The vehicle is used as collateral so if payments are missed it can be repossessed.