You may already be aware, but there are many different ways to borrow money. Whether it’s a personal loan, such as a mortgage or financing, to commercial debt, there’s plenty of options to choose from.
However, while borrowing and debt plays a crucial role in our lives, many of us are unaware of the various types of debt and how they work.
To help you make the distinction more easily and use debt in a way that helps you manage your finances better, we bring you the first of our 2 part article.
Today, let’s explore the most crucial types of borrowing, how they work and how you can manage them better. Let’s get started!
2 Main Types of Debt
When it comes to borrowing, there are generally two main categories, namely
- 1. Secured Debt, and
- 2. Unsecured Debt
These borrowing types are further divided into different types that are widely used across the world of finance.
However, in this article, we’re only going to talk about different types of secured debts. To find out more about unsecured borrowing, keep an eye out for our next blog, “Ways to Borrow How They Work - Part 2 - Unsecured Loans”
Probably one of the most widely used and accessible ways to borrow, secured loans are backed by collateral. These loans are “secured” by the personal property of the borrower like houses, cars, jewellery, etc. This allows the lender to typically offer more flexible terms and greater amounts.
When it comes to secured loans, the interest rates are usually lower than the normal rate of interest. This is because of the low risk on the lender’s part and the increased risk on the borrower’s part. Here the borrower takes a greater risk because in extreme cases when he / she fails to pay the debt back, the lender claims the right to seize the collateral and retrieve the money back. Let us tell you a little bit about some of the different types of secured debt
1. A Mortgage
Just in case you don’t know, a mortgage is a type of secured debt taken when you’re looking to buy a home, and don’t have the funds available to buy outright. With a mortgage, the property itself is the collateral.
Mortgages are usually paid back in the form of monthly payments spanning over 10 to 40 years. The time period is usually decided based on the amount borrowed, monthly repayments and the borrower’s affordability.Furthermore, these types of loans are generally divided into two different types, namely fixed rate and variable rate. While the details of mortgage rates are incredibly complicated, let us tell you what you need to know.
Fixed-rate mortgages are borrowed with a fixed interest rate that isn’t affected by the ups and downs in the economy for a certain period of time. Variable-rate mortgages, on the other hand, come with a variable interest rate that varies based on the base rates set by the Bank of England. With all the recent and expected changes in interest rates, it may be worth exploring a fixed rate mortgage sooner, rather than later.
2. Car Finance
Car finance, while secured loans, work slightly differently than a mortgage. There are usually three common options you can choose from when it comes to car finance. These are personal loans, Personal Contract Purchases (PCP), and Hire purchases.
Personal loans for cars are just as simple as they sound. You apply for a personal loan for your car at a bank. The bank accepts your application, decides on an interest rate based on your credit assessment and transfers the money to you. You use the money to purchase your car and pay it back to the bank in monthly repayments spanning over a predetermined period of time. One thing to note is that, in this case, you will own the car outright!
PCP are where you enter a contract with a lender and pay a deposit on your car, along with fixed monthly payments. In this case, the ownership of the car remains with the lender and the possession remains with you. At the end of the contract, you have the option to either pay the remaining balloon payment and own it, return the car or exchange it!
Finally, a hire purchase is even more simple. Here you put down a small deposit on the car and agree to make certain monthly payments to the lender. While you continue to make the payments, the lender shall own the vehicle whilst you keep it in your possession. However, after the final monthly payment, the ownership of the vehicle shall be transferred to you.
3. Logbook Loans
Logbook loans may seem similar to car loans but are actually quite different. Whereas car finance is used to purchase a car, with a logbook loan, a car you already fully own is used as collateral for borrowing. This loan can be paid back with monthly repayments made over a short period of time.
In these circumstances, you continue to possess the vehicle as usual, however, its ownership remains with the lender. Finally, once you’ve repaid the loan amount in full, you regain ownership of the vehicle.
Logbook loans typically come with very high interest rates, and you could end up having your vehicle repossessed.
That’s why we believe our More Than Your Score loans may be worth looking at instead.
Choose Salad Money For Affordable Low Credit Loans
In this piece, we explored some of the most common forms of secured borrowing and how they work. However, while these loans are a way to borrow money when in need, they do come with risk.
At Salad Money, we’ve created More Than Your Score Loans, allowing you access to fair, personal loans regardless of your credit score.
At Salad Money, we aim to provide affordable personal loans to employees who have been wronged by the traditional credit score system.
To learn more about our services, click here and keep an eye on our blog page for the second part of this blog, “Ways to Borrow and How They Work - Part 2 - Unsecured Loans.