What are the four types of loan?
Looking for finance? Making head or tails of Australia’s highly competitive lending market can be a challenging task. You not only have to figure out the right loan type for your needs and circumstances but also get your head around different lenders’ eligibility requirements and compare rates and terms.
It can be exhausting thinking about it, let alone doing it.
To help, we’ve unpicked the four most common loan types below. These are:
- Secured loans
- Unsecured loans
- Fixed-rate loans
- Variable-rate loans
What is a secured loan?
A secured loan is a loan guaranteed by an asset such as a car, boat or caravan. This means if you fail to make the loan’s repayments, the lender can take possession of the asset and sell it to recoup its funds.
So, what’s in it for you?
As there is less financial risk to the lender, you may be offered a lower interest rate than if the loan was unsecured. You may also be able to borrow more money or pay back the loan over a longer timeframe (when compared to an unsecured loan).
However, there are drawbacks to consider too. Firstly, there’s the risk you might lose the asset should you subsequently default on the loan. And, as the lender needs to be confident of the asset’s value and saleability, you may face more stringent requirements on what can and can’t be financed. For example, secured car loans commonly come with age requirements, meaning you may struggle to get approved if you want to buy an older vehicle.
What is an unsecured loan?
In contrast, an unsecured loan means you don’t have to provide an asset as security. This means you don’t risk having the asset repossessed if you then default. However, this doesn’t mean you get off scot-free, as you are still legally obliged to pay off any debt you owe should you fail to make repayments.
As the loan isn’t secured on an asset, unsecured loans can be used to finance older vehicles and marine craft than would typically qualify for secured finance.
But, as unsecured car loans are riskier for lenders, you’ll usually be charged a higher interest rate than if you’d gone for a secured loan. Lenders’ eligibility requirements tend to be stricter too, so it can be more challenging to qualify for an unsecured loan if you have a poor credit history.
What is a fixed-rate loan?
Loans come with two types of interest rates: fixed or variable. As the name implies, a fixed-rate loan has an interest rate that remains the same for an agreed timeframe – be this the entire length of the loan or for an introductory period. This means you are protected if market interest rates rise, as your rate is locked in. But, on the flip side, should market rates fall, you could miss out.
Fixed-rate loans can be easier to budget for, as your repayments won’t change during the fixed period of the loan. However, if you want to pay off your loan sooner, you may have to pay a penalty fee for doing so.
What is a variable rate loan?
Variable-rate loans are when the loan’s interest rate is tied to the market interest rate. As a result, the interest rate you get charged can change, up or down, over the life of the loan.
If your variable rate falls, your repayments do too as you’ll be paying less interest. On the other hand, if your rate rises, your repayments increase as well.
Variable-rate loans are often more flexible than fixed-rate loans. You may be able to make extra repayments or pay off your loan sooner without facing penalty fees.
Choosing the right loan is an important decision, as it can impact your finances for years to come. Get the advice you need to make the best decision by working with National Loans. Click here for a free online quote. If you want help, please fill in this online form or contact National Loans on 1300 358 358.