4 Types of Loans and How to Use Them

It would be nice being able to pay for everything with cash on hand. Not only would paying out of pocket help you manage your money, but you wouldn’t carry the burden of interest payments and finance fees. Unless you have very deep pockets, however, paying cash isn’t a realistic option. Houses, cars, holidays, business start-ups, and other expenses are simply too costly to rely on your bankroll. Instead, various types of financing are available, accommodating life’s myriad spending demands.

Popular Forms of Funding

Loans help advance your most important financial values, so settling on the right type of funding is critical for keeping your overall cost of credit as low as possible. If you are unsure about consumer credit, use these loan descriptions and other Readies resources to take the guesswork out of personal lending.

1. Consolidation Loans – Over time, your finances can become burdened with outstanding balances resulting from various loans, credit cards, and personal repayment commitments. Consolidation loans are designed to capture all or most of your debt obligations under a single repayment umbrella.

There are a few distinct advantages to taking this approach, particularly when some or all of your debt carries high interest rates. Revolving credit card accounts, for instance, are notoriously expensive, dragging down your finances with some of the highest lending rates you’ll encounter. Taking out a consolidation loan not only eliminates the weight of credit card interest, but it also enables you to make fixed payments, as you work to reduce your balance. As an added benefit, your once-cluttered suite of monthly outgoings can be reduced to a single payment each month, covering all your debts at once.

2. Payday Loans – Strictly for addressing short-term spending needs, payday loans are guaranteed by your earnings. Typically capped at less than £1,000, the loans are made available by several providers. Once approved (usually without a formal credit check) the loans are quickly funded, providing instant access to the cash you need. In exchange, you are required to repay the money under the terms of the deal, returning on or about your next payday to wipe the debt. Penalties are in place, should you fail to make good on time, so you should explore other possibilities when long-term financing is required.

3. Instalment Loans – A consistent repayment schedule is one of the benefits of using an instalment loan to fund your financing needs. Unlike revolving accounts, which rise and fall according to your ongoing spending habits, instalment financing provides a set sum and a well-defined repayment plan. Anticipating your monthly instalment loan payment obligation, which doesn’t change during the life of the loan, makes it easier to integrate the responsibility into your monthly outgoings. And by paying timely, every time, you’ll boost your credit strength as you wipe your balance.

4. Car Loans – There’s more than one way to finance a car purchase. A regular personal loan or funds provided by a friend or family member will get the job done, but a dedicated car loan may furnish a simpler, more cost-effective solution.
Car dealers commonly work with finance companies, furnishing on-site loans for car buyers, but these aren’t your only options. In fact, you may pay a higher rate at the dealership, than you would taking out a loan with an independent provider. Before making commitments – or even shopping for a car – it makes sense to explore car loan interest rates offered by credit unions, banks, and finance firms. For peace of mind and access to the most affordable financing, search online and consult with representatives from financial institutions where you already do business.

Consumers rely on credit every day. From revolving credit card accounts to quick-cash payday loans, borrowing opportunities keep cash flowing through your personal economy. And when major purchases need funding, mortgages and car loans help you pay for things you’d never afford with only the money in your pocket. As long as you properly manage debt and keep accounts current with timely payments; these 4 types of loans will help you reach your financial goals, without straining your credit score.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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