Types of Loans

Credit Cards - the easiest way to access extra funds is by borrowing on a credit card. Credit cards are generally used for making comparatively small purchases in retail locations on the high street or on the internet, and most cards will come with an interest free time period during which you can purchase products and not be charged any interest so long as you repay the outstanding debt within a certain time frame, anything from around 30 or 50 days, depending on the terms and conditions.

The ease of borrowing and spending capital is both the biggest advantage and disadvantage of credit cards. Once you have successfully applied for one, you can instantly access any amount of money up to a limit specified without having to fill in any other forms - however this near-instant availability of credit can mean that if you're not careful, you can very quickly get into debt, which you may have to pay back at a rate of interest less favourable than that you would find on other loans.

Secured Loans - any type of loan that is secured using any property owned by the client - usually the house they live in. As secured loans are low-risk investments from the lenders' point of view, secured loan customers benefit from lower rates of interest than those available on an unsecured loan.

Unsecured Personal Loans - personal loans that are 'unsecured' against any kind of collateral that the lender can use as insurance in the event that you may not be able pay them back - thus an unsecured personal loan suffers from a rate of interest higher than that of a loan which is secured.

Mortgages - Mortgages are large loans taken out in order to pay for a property. Mortgages are typically split up into two different types, Repayment and Interest Only. Repayment mortgages means that once the loan has been taken out, you start paying back interest as well as a part of the debt owed - these are generally more expensive than the alternative, which is to take out an interest only mortgage where you only pay back the interest on the mortgage.

For either type of mortgage, there are a number of ways in which you can pay back the interest. These are as follows:

• Variable Rate - a rate of interest that is set slightly higher than the Bank of England base interest rate, and moves with it, similar to interest earned on a Tracker account. This means that should interest rates fall, you will end up paying less, but by the same token you may end up paying much more if rates rise.

• Tracker Mortgages - these types of mortgages are similar to variable rate plans in that the amount of interest you pay back will fluctuate. However, the interest rate of a tracker mortgage is tied closer to general interest rate changes, meaning you will still feel the pinch of a rate hike, but will benefit from any cuts to a greater degree than you would if you were paying interest back on a variable rate plan.

• Fixed Rate - on certain mortgages you may be able to agree a fixed rate of interest with your lender, which means you avoid the possible pitfall of an interest rate rise which would penalise those with a variable rate mortgage plan. Thus, having a fixed rate mortgage repayment plan means you know exactly how much you have to pay each month.

• Capped Rate - Capped Rate mortgages strike a flexible balance between the variable and fixed rate plans - you agree on a ceiling or cap limit on any interest rate changes in advance of any Bank of England announcements, meaning you can only be charged a certain amount, even if rates rise to exceed this. However, if the rates fall, then you can still take advantage of the low interest as you would be able to with a variable rate plan.

• Discount Rate - a type of variable rate mortgage plan, usually pitched at first time buyers, where the interest rate is variable, but for a certain period of time, which can be anything from three to six months, or more, your payments are discounted, after which time, the rate will revert to the standard rate of the variable account.

Remortgages - a remortgage loan is a secured loan that is taken out alongside an existing mortgage plan that is being or has been paid-off. As a remortgage loan is secured, the rates of interest are lower than rates on a standard unsecured loan, one reason why they are attractive to home owners looking to pay off other loans or credit cards debts which will have comparatively higher interest rates.

As the security for this type of loan is your house, lenders will want to lend to a low-risk secure customer - if you have lived at the house which you will be using as collateral, it helps if you have been living at the address for a number of years, and have a good credit history. See elsewhere on this site for advice on maintaining a good credit history.

Graduate Loans - a graduate loan is a type of unsecured loan specifically for those who have recently finished a degree and are in the first few months of work. Whilst studying, it is has become increasingly common for students to accumulate personal debt on overdraft accounts in addition to any government student loan they may have taken out - graduate loans are typically used as unsecured consolidation loans. Interest rates on graduate loans are slightly lower than those found on standard unsecured personal loans, making these loans popular with the post-grad demographic.

Consolidation Loans - a single loan used to pay off  multiple smaller debts, thus consolidating any outstanding balances under a single repayment scheme - usually a consolidation loan will save customers money in the long term, and are popular as they are easier to manage than many smaller loans, which may have differing interest rates; all debt is made payable to one lender with one interest rate.

Consolidation loans are generally easy to come by, as they are taken out with the intention of paying back debts, and so a less-than-perfect credit rating should not affect your ability to apply for one.

Related Frequent Questions:

• Guide to Savings Accounts
• Reports and Credit Ratings