Four Methods of Long Term Finance

Looking for long term personal finance?

This article is for individuals who wish to borrow money over the longest possible period. It is intended as a brief introduction to four different types of loan – personal loans, secured loans, mortgages and payday loans. By outlining the pros and cons of each type of finance it should give the reader some guidance as to which is best for them. It should not be taken as professional advice, and is relevant mostly to the United Kingdom market.

Qualifying Requirements
To be able to apply for each type of loan you must pass certain criteria. Those applicable to each of these four loans are:

1) You must be in some form of employment, whether permanent, part-time, seasonal or temporary.
2) You must be a UK resident, with a UK address.
3) You must be over 18 years of age.

Personal Loans
A personal loan, also called an unsecured loan, is a way of borrowing up to £25,000 over a maximum period of 7 years. It is a very popular method of borrowing money, as you can borrow a considerable amount without having to put anything up as security, like you do with a mortgage. The amount you can borrow is determined by your credit history, how much you earn, your age, and various other factors. If you have a well paying job, a long history of repaying money on time, and haven’t already got too many other loans / credit cards then you stand a good chance of being able to borrow close to £25,000. On the other hand if you are young and without a credit history then you won’t be able to borrow much. A personal loan is historically one of the cheapest ways to borrow money, with most rates somewhere between 6 and 15% over the last few decades.

Secured Loans
With a secured loan you can borrow up to £100,000 and repay it back over as many as 25 years, making this a very long term borrowing method. You need to have a house to borrow this way, as the house is the lenders security, hence the name ‘secured loan’. If you cannot afford to repay the loan, then the lender can repossess your house. Another caveat is that you must have some equity in your house, i.e. your mortgage cannot be for as much as the house is worth. For example if your house is worth £200,000 and you have a £100,000 mortgage, then you could potentially get a £100,000 loan. Usually a secured loan will have a slightly higher interest rate than the equivalent personal loan, so unless you want to borrow more than £25,000, try for a personal loan first. You may also be able to borrow the same amount of money by extending your mortgage, which will be a lower interest rate in nearly every case. So a secured loan should really come last, after you have first checked whether you can get a personal loan or mortgage extension.

Mortgages
With a mortgage you can borrow close to as much as the house is worth. So if you have a £200,000 home, and only a £100,000 mortgage, then you could remortgage and borrow close to £100,000, leaving you with a mortgage that is nearly as much as your house is worth. Before the credit crunch of 2008-9, you could easily borrow exactly as much as the value of home, but now it’s a little less. It also offers potentially the longest period you can borrow money over, with some mortgages being up to 40 years long. As with a secured loan, if you cannot afford to repay your loan, then the lender can repossess your home to get their money back. So be extra cautious when borrowing this way. Out of the four different types of loan discussed in this article, this method will be the cheapest way to borrow money in almost every case. Remember that if you are borrowing money over a really long period, such as 25 years or more, then you will ultimately have to pay back over double the amount of money you originally borrowed. Try to find a balance between paying it back quicker and keeping your monthly repayments down. If you are aiming to pay it off all in one go before its term is up, make sure you do not get a loan with an early repayment fee.

Payday Loans
A payday loan is the shortest type of loan discussed here; usually you can only borrow over a period of up to 2 months. It is called a payday loan because when it’s your payday, you repay the lender. These loans are generally aimed at people who need between £100 and £1000 for a few days or weeks. Interest rates are very high, often between 500 and 2500% APR, so if you need to borrow £100 for a month you can easily be paying back £130 the next month. If you can’t afford to repay it back for a month or two, you could easily end up repaying over £200 for that original £100. Never ever do this! If there’s a chance you think you will struggle to repay the money back in just 1 or 2 months time, instead consider a personal loan where you could repay over a few months. As with a personal loan you don’t need any security for a payday loan, so anyone meeting the qualifying requirements above can apply for one of these loans.

Summary
So that’s four methods of borrowing from £100 to £100,000 over a period of between 1 month and 40 years. That should be enough to get you started on deciding which loan could be right for you.