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Loans
Fixed amount, fixed repayments
The first is by far the most common type of loan and is where you borrow a fixed amount of money at a fixed rate of interest. Your repayments are also fixed at the start of the loan, so you know you'll pay exactly the same each month, no matter what happens.
You can sometimes borrow a fixed amount of money at a variable rate of interest too, in which case your repayments are not fixed.
Flexible
The second allows you to borrow up to a certain limit. It's up to you how much you borrow within the limit, or when you pay it all back. The monthly payments are usually a minimum amount of what you've borrowed or a per cent of the outstanding balance. These types of loans offer flexibility, but your repayments aren't set so its more difficult to budget for the repayments. You can get these at either fixed or variable rates of interest.
Key pros and cons of loans
Pros
- You can borrow money for various purposes.
- You can normally borrow from £500-£15,000 and often up to £25,000.
- If you take out a fixed rate, fixed repayment loan, the interest rate and your repayments are set at the start - so you pay the same each month, even if interest rates go up.
- This could be a smarter way to borrow than an overdraft or using a credit card if you need larger amounts of money, or want to borrow for more than a few months.
Cons
- If you take out a fixed amount loan, it's not as flexible as an overdraft or credit card - you often borrow a set amount, not what you need each month.
- If you take out a loan where the interest rates are fixed, if they go down after you've taken out a loan you won't benefit from the reduced rates.
- With some companies, you may have to pay a penalty if you pay off your loan early.
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