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This week, we’re looking at the differences between different types of personal loans, because we know it can all get a little confusing…
Take a look around the Bamboo blog and you’ll notice that we like to take the time to debunk personal finance myths, bust open the pinata of finance jargon and break things down into easy-to-understand terms.
And one of the main questions we hear people ask time and time again with loan terms is: what is the difference between different types of personal loans?
For example, what’s the difference between secured and unsecured? What’s the difference between an unsecured and guarantor loan?
So, this week, we thought we’d break down 5 different questions about the different types of personal loans and the differences between them. No jargon. No nonsense. No complicated terms.
Just a quick guide that you can bookmark next time you’re reading about personal finance and pull this face…
You ready? Let’s begin.
What’s the difference between a secured and unsecured loan?
This is a really common question that we hear all the time, so don’t be embarrassed if you’re not quite sure of the difference…
A secured loan, quite simply, is a loan that is protected by something you own. Or, in other words, the money is borrowed against the value of something else — often a car, house or something of value – that the lender owns the deeds to if you can’t pay.
If you fail to make your payments, the lender can seize your collateral, sell it to recoup their money and give you what’s left. That’s a secured loan.
On the other hand, unsecured loans allow you to borrow money without using collateral.
But because lenders take more of a risk with unsecured loans — after all, they have less of a guarantee that they’ll get their money back — they usually charge higher interest rates or aren’t willing to lend you quite as much money.
What’s the difference between an unsecured and guarantor loan?
On paper, there’s no real difference between an unsecured loan and a guarantor loan. In fact, a guarantor loan is an unsecured loan. But in practice, they’re very different.
Confused yet? Here’s how it works.
A guarantor loan is a type of unsecured loan — meaning that you nor your guarantor put up any kind of collateral — but with a couple of extra steps (finding a guarantor, getting them to guarantee your payments and passing some affordability/credit score checks) to get you to the end result of borrowing the money you need.
A standard unsecured loan is exactly the same, but it doesn’t have those extra steps in the middle.
Like we’ve said before, guarantor loans help minimise the risk you represent to the lender by having another person commit to paying any missed payments, so they act as an incentive for lenders to give you better rates on an unsecured loan.
What’s the difference between a variable interest loan and a fixed loan?
This isn’t often an issue when you borrow smaller amounts, but if you’re thinking about getting a mortgage or taking out a larger loan, this issue might come up…
In short, fixed-rate loans are loans where the interest stays the same throughout the entirety of the borrowing period, regardless of the economy or any other factor. Variable interest, on the other hand, is when the interest rate on your loan changes based on the prime rate.
That means that with a fixed rate, you’re able to see how much you’ll pay each month and the total you’ll pay overall. This can help you budget and plan your repayments from the get-go.
Variable-rate loans, on the other hand, can change depending on several factors. So, while that means that you could end up paying less interest than on a fixed interest loan, you could equally end up paying more.
What’s the difference between a debt consolidation loan and a personal loan?
This is another one of those odd ones: there isn’t a difference between a debt consolidation loan and a personal loan.
The process is exactly the same, the only difference between these two different types of personal loans is the name and the purpose.
In other words, a debt consolidation loan is a personal loan taken out to roll debt up into one monthly repayment. That’s it! Everything else is exactly the same.
In short, there are lots of different types of personal loans — from payday to unsecured, secured to guarantor — that are all the same in principle but have different nuances that set them apart. If you’re still struggling to get your head around them — or you want to dive in and learn more — don’t forget to check out the Bamboo blog. It’s packed to the rafters with easy-to-understand advice about personal loans, personal finance and all things money-related. Check it out!
- Author The Bamboo Team
- Posted 25 February 2020