UK Loans and Their Types

Definition of Loan:

A loan is like a debt; given by the lender to the borrower and taken back with extra amount known as interest. It is repaid in installments or up front. In technical terms, interest is called the cost of a loan.

In the modern business world, there are many financial institutions providing loans for business. Loans are divided into two categories that are given below:

Short-Term Loans:

Short term loans are the type of loans that meet maturity within a year or less or are payable within 12 months. Short-term loans include lines of credit, working capital loans and accounts receivable loans.

Long-Term Loans:

Long term loans are the type of loans that are held for more than one year or meet maturity after one year. Mortgage loans can extend from 10 to 20 years. These loans are taken up for capital expenditures of the company such as vehicles, purchasing expenses, construction, furnishing, etc. They are also helpful when business needs help when it is in a depressed or declined cycle. Following are the types of loans banks provide in the UK for starting up small businesses:

Credit Cards:

According to surveys, credit cards are widely used for business purposes in the UK. A revolving credit is considered a good business tool here.

Lines of Credit:

This type of loan is very useful for daily operations. Credit line offers are usually for 90 days but can go a year or two depending on the amount borrowed.

Equipment Leasing:

This is a technique used to help business get equipment. The bank requires your credit history and it should be good. Another way is to lease through the subsidiary of the company.

Letters of Credit:

The bank acts as an intermediary party between the borrower and the lender. It promises to pay the money to the lender if all the conditions are met. This is very helpful in international business.

UK Loans: The Different Type of Loans in the UK

Before securing a loan in the UK for business or personal reasons, it is a good idea to understand as much about loans and the process of getting one as you can. Knowing the jargon is not enough to help you decide which one is the best loan for your situation. You need to understand all aspects before you sign on the dotted line. Loans can be a very high risk financial move so you need to be aware of all aspects before jumping to a decision. Banks are in the business to make money, not lose it, so you have to be careful.

There are many types of loans available and each has its own set of rules, benefits and risks. These are some of the major loan types:

Home Equity Loan

Home equity loans are typically known as a second mortgage. When you need to borrow money an easy way to get it is by using your house as collateral. Home equity means the value that your house is given through a mathematic formula that involves subtracting the unpaid mortgage amount from the market value of the house. Home equity loans are generally quick and easy to get because the loan is based upon your ownership of the house. If you are unable to repay your loan in full, the lender has the right to take the house from your possession to pay off your debt.

Fixed & Adjustable Rate Loan

Fixed and Adjustable refers to the interest rate of the loan. In fixed rate loans, the interest rate remains the same through the duration of the loan. This means the monthly installments are always the same. Adjustable rate loans have payment changes throughout the loan period based on the rate increases and decreases in the market.

Hybrid Loan

This is a combination of fixed and adjustable rate loans that attempts to provide you with the best of both worlds. Initially, the interest rate of the loan is fixed and you have regular monthly payments that do not fluctuate. After a set period of time, the loan becomes adjustable to the interest rates in the market so your payments may be higher or lower.

Secured & Unsecured Loan

Secured and unsecured loans are based on the collateral that you may or may not provide against the approval of your loan. In a secured loan, you have to put up property against the value of the loan. This guarantees that you will repay the loan or the lender has a right to claim your property. In an unsecured loan there is no need for collateral. The loan is approved based on your good credit history and the assumption that you will continue it by repaying the loan. These typically take longer to approve and have higher interest rates.