Different types of loans

Written by: Andy Townsend
Head of Marketplace Distribution, Consumer
5^th September 2022

If you’re considering taking out a loan, it’s important to understand the nuances of the various types of loans available.

Here at Shawbrook Bank, we offer unsecured personal loans, whereas other lenders might provide different loan types. However, being aware of the options available to you can help you make an informed decision about what’s best for you and your circumstances.

This guide outlines the different types of personal loans, secured loans, home equity loans, payday loans, and car loans.

Unsecured personal loans

When you take out a personal loan, you agree to borrow money and pay this back with interest over a set period — usually in the form of monthly loan repayments.

Unsecured personal loans are not secured against any of your assets, such as your home.

Because no assets are secured, these loans are a higher risk for lenders, which means that the rate of interest offered can sometimes be greater than a secured loan. However, at Shawbrook, you’ll always know your personalised rate before you agree to a loan, so there won’t be any surprises.

You can use an unsecured loan for a wide range of reasons, including:

Home improvement

An unsecured home improvement loan can help you fund renovations.

There are many reasons as to why you might consider carrying out a home renovation such as adding value to your home or creating more space for a growing family or a home office.

Even if you're not thinking about selling right now, home improvements could help to maximise the value of your property. For more information, visit our guide on home improvements that add value to your home. It’s important to remember that not all improvements add value and might not go to plan. Visit our Home Improvement Hub for support with your next project.

If you're looking to make larger changes and are comfortable with securing a loan against your property, you may want to consider a home equity loan.

Car purchase

Buying a car is often the next major expense after purchasing a property. That’s why some people will choose to take out a loan to finance a new motor.

You can use a personal loan to cover part or all the cost of a new or used car.

For more information on financing cars this way, visit our guide on how to get a car loan.

Debt consolidation

People with debt can take out an unsecured personal loan to consolidate existing repayments.

This works by using the new loan to pay off some or all of your existing debts and then paying back the new loan over the agreed term.

Taking out a debt consolidation loan can make your finances more manageable as you can reduce the number of monthly repayments you need to make.

It’s important to consider the rate and term (length) of the new loan to ensure you don’t end up accruing more debt or paying more in the long run. A number of factors can affect the rate you’re offered. For more information, visit our ultimate guide to debt consolidation.

Wedding costs

Weddings are another big expense that some people may use a personal loan to fund. A wedding loan can help you spread the cost of your big day or honeymoon over a longer period.

If you’re considering a personal loan for a wedding, visit our ultimate guide to financing your wedding.

Wedding loans work in the same way as any other personal loan — the difference is how you choose to spend the money.

Whether it’s for a wedding, debt consolidation, car, or home improvements, Shawbrook offers personal loans from £1,000 to £50,000 that can be repaid over a fixed-rate loan term between one and seven years.

For more information on the loans we offer and to find out how you can get a personalised quote, visit our dedicated personal loans page.

Secured personal loans

As the name suggests, secured loans are secured against an asset. This will usually be your home but could be your car or another high value item.

Think of your secured item as a form of collateral. Because the lender knows they can take ownership of this collateral if you fail to pay on time, they might offer secured loans at a lower interest rate (depending on your credit score).

But be careful, as although the loans are less risky for lenders, they can be riskier for borrowers. For instance, failing to repay a loan secured against your home could result in repossession.

Home equity loan

Home equity loans are a type of secured loan that uses your home as collateral.

A home equity loan is also a mortgage. The main difference between the terms is that you typically take out a mortgage when you first buy a property, whereas you can take a home equity loan any time after. This type of loan can also be considered the same as remortgaging.

You can use home equity loans to borrow a large amount that may be at a lower interest rate than an unsecured personal loan. But if you fail to pay back your home equity loan, your property can be repossessed.

Payday loans

Payday loans are short-term unsecured loans typically used for small amounts of money.

Although quick access to cash may be helpful for some in the short-term, payday loans will usually charge extremely high interest rates. It’s important to consider other alternatives before you borrow from a payday lender.

Make sure you shop around for the best deal, pay day loans are expensive. For more information about payday loans and support if you’re struggling with money visit citizens advice.  

Buy Now Pay Later

Buy Now Pay Later (BNPL) is a type of loan which allows you to make a purchase and pay for it on a future date.

You’ll have different options for paying off the loan balance, which typically depends on the company used and the amount borrowed. Generally, if you repay the price of what you bought within the allocated delay period but double check for interest and late fees before entering an agreement.

While the idea of spreading your costs for free over time might seem great, make sure you've always got a plan in place for repaying what you owe.

Car loans

An unsecured loan is just one way of financing a car.

Several different finance types are only available when purchasing a vehicle:

• Hire purchase agreement - A hire purchase agreement is a type of loan secured against the car that may or may not require an initial deposit. You pay off the cost of the vehicle in monthly instalments, but you don't own the car until your final payment. This means that if you miss a payment, the lender can repossess your car even if you’ve already paid a substantial amount in monthly repayments.
• Personal Contract Plan (PCP) - With a PCP, you pay an initial deposit and pay fixed monthly instalments over a set period. This differs from a hire purchase because you won’t automatically own the car at the end of the contract. Instead, you’ll have the option of either paying a lump sum to own the vehicle, be able to return it, or trade it in for another car. So, it works more like a long-term rental than a traditional loan.
• Lease - With a lease, you pay a fixed amount every month to use a car and then return it at the end of the contract. With a lease, you typically agree to stick within a certain mileage, and your monthly cost will usually include maintenance.

For more information, read our ultimate guide to financing a used car.

Getting an unsecured loan with Shawbrook

As we’ve outlined, there are many different types of loans and finance available. If you’re looking to borrow money and feel that an unsecured loan will work best for you, visit our personal loans page.

If you’d like more information about how Shawbrook loans work, check out our ultimate guide to personal loans.

All loans are subject to status. The interest rate offered will vary depending on our assessment of your financial circumstances and your chosen loan amount. Terms and conditions apply.