Finding the best loan for you

Loans are a credit product that many users can be overwhelmed by. Our guide will tell you how they work and everything you need to know when applying for one.

What is a loan?

It’s money you can borrow from a bank,  building society or money lender that you pay back over an agreed period of time with interest. There are two ways of borrowing money as a loan:

  1. Unsecured loan: personal loans, short-term loans and car loans
  2. Secured loan:  a long term loan that’s secured against an asset

What can a loan be used for?

For most loans, how you spend the money is up to you, but popular reasons for getting a loan are:

  • Buying a car
  • Paying for a holiday
  • Making home improvements
  • Covering wedding costs
  • Consolidating debts
  • Renovating a property

Some loans offering low loan interest rates may require you to use the finance for specific purposes, such as home improvements.

How does a loan work?

If your loan is approved, you’ll get the money in your bank account and pay it back in monthly installments. However, you’ll either borrow money as an unsecured or secured loan and there are some key differences in how they work.

Unsecured loan

Unsecured loans are loans that a bank or online loan lender makes that are not secured against any asset such as your home.

This type of loan is typically charged at a lower rate of interest than a credit card. The interest rate is fixed and repayments are made monthly.

You can control how long you’d like to repay the loan, but the longer you take to repay it, the more interest you’ll be charged.  The typical loan term is between one and 10 years.

They’re a good option if you have a good credit score and regular income.

Secured loan

This type of loan is secured against your home or a property you own. This equity is used as collateral, which means that if you cannot make repayments on the loan, the equity in your property will be used to cover the debt.

Secured loans are usually for borrowing more than £10,000 for up to 30 years, so if you only want to borrow short term or a small amount, a secured loan may not be your best option. However, interest loan rates are often lower than personal loans or credit cards and it’s an option worth considering if your credit score is low.

You’ll need to weigh up the pros and cons of a secured loan carefully because your home is at risk if you cannot keep up with repayments.

What are the different types of loan?

There’s a loan to suit every purpose, budget and time period.  Some types of loan are cheaper than others but you’ll get the best loan rates if you have a good credit history.

Here are the main types of loan you can get from banks, online loan companies or money lenders.

Personal loans

A personal loan is a standard loan from a bank, building society or money lender. You don’t need to provide collateral and terms of repayment tend to be more flexible.  However, if you’re looking to borrow a large amount this could be a costly option and mean high monthly repayments.

You can use a personal loan for any purpose, such as buying a car, going on holiday or a wedding.

Secured loans

Secured loans are also known as second charge mortgages or homeowner loans.

This type of loan is secured against an asset you own. In most cases, this is your home or a property that you have a stake in.

The equity in your property is used as collateral, this means that if you cannot make repayments on the loan, the equity in your property will be used to cover the debt.

Home improvement loans

Some lenders offer large unsecured loans specifically for home improvements. You can borrow up to £25,000 and pay it back over a set period of time.  You will need a good credit rating to get approval for this type of unsecured loan.

Some home improvement loans are secured loans, which are a better option for long term borrowing or large amounts.

Car loans

This is a personal loan to finance a car purchase as an alternative to Hire Purchase or a Personal Contract Plan (PCP).  They’re unsecured finance loans, so they work in the same way as personal loans.

A car loan is a good option if you want to own your car outright and spread the cost of payment without getting tied down by a contract.

Bad credit loans

These are bank loans designed for people with a poor credit history and existing bad debts. They’re the same as a personal loan but are offered by specialist money lenders with high-interest rates.

An online loan lender may accept your application even if you have bad credit, but the interest rate will be higher because of the risk you may default on repayments.

Guarantor loans

Guarantor loans are a type of unsecured loan where someone else (usually a close friend or family member) guarantees that the loan repayments will be made if you can’t make your repayments. They will need to undergo affordability and credit checks but the loan terms will be the same as a personal loan.

Debt consolidation loans

If you’re seeking a secured loan to pay off other debts, a debt consolidation loan allows you to borrow money to pay off multiple debts, e.g. credit cards, store cards, and overdrafts, which you then pay back in one monthly repayment.

If you’re having trouble keeping track of what you owe, this can be a helpful way to gain control over your debt and rebuild your credit score.

How much can I borrow?

This will depend on several factors, such as:

  • Income & expenditure
  • Credit history
  • Type and purpose of loan

Income

If you’re planning to take an unsecured loan, lenders look at your income and employment status to assess your repayment capacity. If you have a regular, good income, you’ll likely be able to borrow the maximum amount offered and the interest rate will be favourable.

Credit history

Banks and money lenders use your credit history to work out how much risk they are taking by lending you money. Your chance of approval and rate of interest will depend on your credit rating and ability to repay.

If you’ve missed or made late payments on a loan, credit card or mobile phone bills in the past, you may have a poor credit rating.

Purpose of the loan

The maximum you can typically borrow as an unsecured or personal loan is around £30,000. Whether your loan lender agrees to that amount will depend on your income and credit history.

Secured loans tend to have a ceiling of around £500,000, but this will depend on how much equity you have in your home and how much you can realistically afford to repay each month.

How do I apply for a loan?

You can apply for a loan in several ways.

  • Online
  • Via a banking app
  • Over the phone
  • In person at a bank branch

If you’re clear about your borrowing needs, then you may benefit from better rates if you apply for your loan online.  If you want to talk through your options and costs it may be better to apply for a loan over the phone or in person.

Documents you need

This will depend on where you get a loan.  If you apply with your current bank, it’s best to check with them before your loan application.

If you apply with another lender, more loan eligibility checks may need to take place.

Documents you’ll likely need to provide include:

  • Proof of identity, such as your passport, UK driving license and a bank statement less than 3 months old.
  • Proof of residence, such as a utility bill less than 3 months old, mortgage statement or water bill less than 12 months old.
  • Proof of your right to live and work in the UK.
  • Proof of income, such as payslips, 12 months bank statements, tax calculation, pension or benefit evidence.
  • Employer details, evidence of self-employment or directorship.

You will need a current account with the facility to set up a direct debit or standing order and fit other eligibility criteria set by the lender.

How do I know if I will qualify?

All lenders will have different eligibility criteria, but generally, you must be:

  • at least 18 years old
  • a UK resident and able to provide proof of address
  • able to repay the loan with proof of income or assets
  • creditworthy and pass a lender’s credit check

What are the risks of taking out a loan?

Taking out a loan can be a great way to solve short term cashflow or spread the cost of a large purchase.  Borrowing money can be risky if you’re not aware of the pitfalls. It’s important you understand what happens if you’re late repaying, miss a payment or can’t pay back the money you owe.

What should I know before I get a loan?

Unsecured personal loans depend on your ability to repay on time and within the loan term.  If you can’t keep up your commitments to the lender you risk:

  1. Additional fees and penalties that could increase your debts further
  2. Hurting your credit score and chances of approval for further borrowing
  3. Paying higher bank loan interest rates for store and credit cards

Secured loans come with additional risks – although a secured loan can be a good way to use the equity in your home to release extra funds, it’s very important you understand the potential dangers.

Put simply, if you cannot make repayments on your secured loan, your house could be repossessed.

Does taking out a loan hurt your credit?

Getting a loan will not adversely affect your credit rating if you don’t miss any repayments and always pay them on time.

In fact, a personal loan could help you to build your credit score and get credit in the future if you can prove you’re a reliable borrower with regular, on-time payments.

What are the advantages of getting a loan?

A loan is a helpful way to get money quickly and spread the cost of large purchases or projects over a period of time and is generally a cheaper alternative to credit cards or other types of borrowing.

The best loan companies offer low interest rates with flexible payment options, and as long as you stick to your repayment terms, a loan can be a low risk borrowing method.

A loan can help you:

  • Spread the cost of large purchases into affordable repayments
  • Cover short term cashflow with a low, fixed interest rate
  • Help you manage your debt in a controlled way
  • Fund home improvements to increase the value of your property

What are the disadvantages of taking out a loan?

Whilst there are some advantages to taking out a loan, it’s always worth weighing up the pros and cons.  Here’s some of the pitfalls to watch for:

  • You could damage your credit score if you default on repayment
  • Your home is at risk if you can’t keep up repayments on a secured loan
  • Your approved interest rate on a low APR loan may be higher than advertised
  • Fees and penalties for late or missed payments could leave you in bad debt
  • Applying for lots of loans could leave a mark on your credit report
  • Paying off your loan early could land you with early repayment fees

Only take a loan as a last option. If you can afford to pay for purchases or projects with cash or savings, you might be better off choosing those methods of payment over a loan.

How to get the best loan

Cheap loans are not always the best loans – if you want to borrow money online it’s good to know what to look for.

Check the overall cost of the loan because the final amount payable may end up being more than you think. Interest rates and extra fees will always make credit more expensive than paying in cash.

The lower the interest rate, the cheaper your loan will be although you may not get the advertised rate. We include the typical APR (Annual Percentage Rate) for each lender in our loan comparisons so you can get an idea of the cost before you apply.

Keep the repayment term as short as you can afford because the quicker you pay back the loan, the cheaper it will be. Set your monthly repayments at an affordable level but don’t spread the cost for longer than you need to.

Check for early repayment fees and other charges for late payments, missed payments and sometimes arrangement fees. Be sure to check the small print and check for any changes that could occur during the loan period.

Know your credit score and what it means because some banks may be reluctant to give you a personal loan if you have a poor credit rating. A low score may mean interest rates are higher too, so work on building your credit score to maximise your chance of getting the best loan.

However tempting it may be, don’t be tempted to borrow more than you need.

Loans FAQs

Is a personal loan cheaper than a credit card?

It depends on how much you borrow and how long for.

Credit cards allow you to borrow to a set limit that will depend on your credit score. 

A 0% purchase credit card or balance transfer card used wisely can be a cheaper option than a loan for borrowing smaller amounts of money for a short amount of time. Credit cards can also be more flexible if you want to repay early.

Can I get a personal loan with bad credit?

Yes, you can, but you’re likely to pay higher interest rates, which means your loan will be more expensive. Banks are more reluctant to lend to people with bad credit, but there are many specialist money lenders who may be able to help.

A good first step to getting a loan with bad credit is to check your credit score and work on repairing it so you can get better credit facilities in future.

Can I get a payment holiday on my loan?

If you have a change in your financial situation and think you’re going to struggle to repay your personal loan, contact your lender immediately. They may be able to arrange a repayment break, but check it doesn’t affect your credit score.

Your payments will still accrue and you will need to repay the deferred payments including interest when the repayment break is over. This means that you may pay a higher amount per month than before the holiday period.

What does APR mean?

APR is short for Annual Percentage Rate – which means the amount in interest you’ll pay on top of the amount you’ve borrowed. Any extra fees or charges are added to the loan amount before APR is calculated.

It’s a legal requirement for credit lenders to show their APR so an easy and fair comparison of interest rates can be made between lenders.

More loan options

We compare a range of loans to help you find best guarantor loan, short term loan, car loan or home improvement loan for you.