Different types of credit loans

Overdraft:
An overdraft is an extension of credit from a lending institution that is granted when an
account reaches zero. The overdraft allows the account holder to continue withdrawing
money even when the account has no funds in it or has insufficient funds to cover the
amount of the withdrawal.
Advantages:

 An overdraft is flexible; you only borrow the amount of money you need at the time
which may make it cheaper than a loan.
 If you pay off your overdraft earlier than the time it is due, then you are not charged
a fine.
Disadvantages:

 However, if you have to extend your overdraft you usually have to pay an
arrangement fee.
 The bank where you are taking money for this overdraft has the ability to take your
money at any time, although this is unlikely to happen unless you get into financial
difficulties.

Personal loans:
A personal loan is money borrowed from a bank, credit union or online lender that you pay
back in fixed monthly payments, or instalments, typically over two to five years. Lender
rates can range from 6% to 36% APR.
Most personal loans are unsecured, not backed by collateral. A secured loan backed by a car
or house is typically cheaper, but you can lose the asset if you default. You usually can use
the money for any reason.
Advantages:

 You can get hold of these loans quickly as they have a high availability. In some
cases, you can get these loans within 24 hours, so if you are in desperate need of a
loan then personal loan is a good choice to take.
 Normally, personal loans don’t need much documentation, as compared to home
loan or a car loan. Hence the processing time is quicker.
Disadvantages:

 As these loans don’t need any security, they are regarded as high risk by the lenders.
In order to offset their risks, these loans carry very high interest charges.
  Most lenders don’t allow part payments of loans. This means you end up paying the
loan of the entire tenure of the loan. It can work out quite expensive, since your
initial instalments go towards interest payments.
Hire purchase:
Hire purchase or leasing is a type of asset finance that allows firms or individuals to possess
and control an asset during an agreed term, while paying rent or instalments covering
depreciation of the asset, and interest to cover capital cost.
Advantages:

 Customers can usually purchase newer cars at a current time when they do not have
the full amount to pay for and pay in instalments which they may find more
convenient and comfortable.
 The instalments are paid monthly.
 There is no VAT pay on monthly instalments, compared to leasing the vehicle.
Disadvantages:

 The loan is secured against the vehicle. If the payments are not kept, then the car
can be repossessed.
 Repayments will include interest charges, and the car will overall cost more than a
cash purchase.
Mortgages:
A mortgage is a loan that enables you to cover the cost of a home. Since you probably don't
have hundreds of thousands of pounds lying around, a mortgage loan makes it possible to
purchase real estate by fronting you the money.
Advantages:

 Buying a home is likely to be the biggest purchase you’ll ever make and a mortgage
will be your largest debt. Because you can spread the repayments on your home
loan over so many years, the amount you’ll pay back every month is more
manageable, and affordable.
 Traditionally, when people take out their first mortgage, they’ve tended to opt for a
25-year term. However, there are no rules about this and as we are living longer and
the retirement age is going up, 30-year mortgages are becoming more common. This
can help bring your monthly payments down, but on the flip side you’ll be saddled
with the debt for longer.
 It’s worth going for the shortest term you can afford – not only will you be mortgage-
free sooner but you’ll also save yourself thousands of pounds in interest. And don’t
forget, when you remortgage and switch to a new product, you shouldn’t opt for
another 25 or 30-year term.
Disadvantages:

 The most obvious disadvantage is that you are carrying an enormous debt over a
long time. The other major drawback is that since the mortgage is secured on your
property, you have to be able to keep up with your mortgage repayments or you
could lose your home.
 During the credit crunch, lenders worked hard at keeping even those struggling with
the mortgage in their home. But if homeowners really can’t make the repayments,
their home will be repossessed. The bank or building society will then sell it to
recover their money.
 Although the monthly amount you’re paying may seem reasonable, the total amount
you pay back over the years is huge. For example, someone who borrowed
£160,000 over a 25-year term would repay £280,600 in total once interest is added
on (This assumes the rate of interest averages 5% over the term.)
Credit Card:
A credit card is a plastic card that gives you access to credit you can spend to make
purchases, reduce debt, and earn rewards. A credit card may be issued by a bank, building
society, or other type of credit lender. Credit cards essentially work as a loan, but instead of
getting money in your bank account you get credit on your credit card. Your lender will set
you a credit limit, and you’ll be able to spend as much of it as you need before paying back
some or all of your balance each month.
Advantages:

 Spreading purchases out: with a credit card you’ll be able to spread out the cost of a
large purchase, such as a home appliance, over several monthly payments. This can
be useful for emergency situations where you might struggle to pay immediately for
something you need
 Buying now to pay later: it can also be a more convenient option to use a credit card,
as it can let you buy a product or service but not pay for it until payday rolls around
and you can make your monthly repayment.
 Having purchase protection: any purchases you do make for between £100 and
£30,000 on a credit card are protected by Section 75 of the Consumer Credit Act.
This means if the transaction goes wrong, for example if the selling company goes
bust or if the purchase is faulty or goes missing, you can claim the cost back from
your credit card provider. You’ll also be able to claim for a refund if your credit card
is used fraudulently, as long as you weren’t negligent with it – read more with our
guide to credit card security.
Disadvantages:

 The possibility of debt: the main risk of taking out a credit card is that you could put
yourself in rising debt if you aren’t able to pay back what you borrow. Some credit
cards can charge high rates of interest, sometimes over 20%, and this can build up
quickly if you don’t pay the balance off.
  Your credit score: letting your credit card debt build up, or missing payments, can
influence your credit rating. The lower your credit rating the harder it will be to apply
for credit in the future.
 Fees and charges: credit cards can also come with fees and charges if you don’t meet
your repayments or you exceed your credit limit. You need to be careful with how
you use them.
 Limited usage: you might be restricted in how and where you can use your credit
card. For example, many will charge you for withdrawing cash or using the card
abroad unless stated otherwise in the credit agreement.
Payday Loans:
A payday loan is a short term loan that can help you cover immediate cash needs until you
get your next pay check. These high cost loans usually charge triple digit annual percentage
rates and payments are typically due within 2 weeks or your next payday.
Advantages:

 The loan amounts are small and hence the borrowers are also comfortable. Lastly,
the entire process of applying, evaluating, approving and disbursing the loan is done
quite efficiently. In most of the cases, the payday loan companies will credit the
borrowers bank accounts within a few hours or within the same day.
Disadvantages:

 Doesn’t solve big financial problems: Payday loans can take care of small needs.
 High rates of interest: Payday loans have one of the highest rates of interest.
 Petish