What are the different types of loans available?

For many people, the definition of a loan ends with it just being a means to getting extra money. In reality, there are different types of loans available. Even though they do provide ways of accessing extra finances, borrowers need to understand that their reasons for applying will determine the type of loan they apply for.  

Julio is a student looking for ways to finance the rest of his studies. By applying for a certain type of loan he could achieve his goal. He needs to be informed about his options though. 

Unsecured loans are not backed by collateral. The interest rates on these loans are determined by credit history and income. 

Secured loans require individuals to leverage their assets in order to obtain the funds. The risk for the lender is mitigated by the security, while for the borrower, defaulting on payments will lead to loss of the asset.  

Payday loans are short-term solutions, designed to be paid back by the applicant’s next payday. In South Africa, these loan amounts tend to range from R500 to R2500. Lenders may occasionally offer borrowers up to R8000 following timely payments. 

Debt consolidation loans are ideal for paying multiple debts off. By combining numerous debts into one amount, individuals are able to make one payment instead of several. These may be lower, depending on the length of time over which the loan is being paid. 

Loans that require surety are designed to offer applicants the opportunity to get funds that they otherwise wouldn’t be able to, due to them either not having established a credit record or due to having a poor record. By asking someone with a stellar credit record to act as surety, this means that if the applicant defaults on payments, the surety pays the loan their behalf. 

Understanding the different types of loans available is essential for making sound decisions. You need to know which finance option is best for your specific needs.