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By Matt Fernell, Editor-in-Chief at Finance.co.uk.
Find out everything you need to know about how a loan works, the different types of loans available, and what you should know before you apply.
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We’ve partnered with Loans Warehouse, whose award-winning service allows you to compare loans from a range of trusted UK lenders.
Here’s what to look out for when comparing quotes to help you find the right loan:
Check the APR: The annual percentage rate (APR) shows you have much interest you will need to be on top of your loan. The lower the interest rate, the cheaper your loan will be, although you may not get the advertised rate.
Choose the right term: The loan term is how long you’ll make repayments for. The longer the term, the smaller your monthly repayments will be, but the more you’ll pay back in interest overall. Try to choose the shortest term with repayments you can comfortably afford.
Look out for fees: All loans include charges for late payments, missed payments and early repayment. Ideally you won’t need to pay any of these fees, but it pays to know what they are before you apply so you don’t get caught out.
Work out the overall cost: The total amount payable over the term could be more than you think. Compare loans by the total repayable amount over the term to find the best deal.
To be eligible for the best loan deals, you need to have a good credit score. It’s worth checking your score regularly and taking steps to improve it as much as possible.
When you compare loans with us, we will perform a ‘soft check’ on your credit report, which won’t affect your score. This means we only show you the loans you’re eligible for so you can apply with confidence.
A loan is money you borrow from a bank, building society or direct lender that you pay back over an agreed period of time with interest. There are two main types of loans you can use to borrow money:
Unsecured loans: personal loans, short-term loans and car loans
Secured loans: a long-term loan that’s secured against an asset
If your loan is approved, you’ll receive the money via your bank account and pay it back in monthly instalments. Your monthly repayments will include part of what you’ve borrowed and interest.
For example, if you get a loan for £10,000 over five years with an APR of 7%, your monthly repayments would be £197. That means the total amount repayable would be £11,819.94, so the loan would cost you £1,819.94 over the five year term.
There‘s a wide range of different loans available, each tailored to different purposes, budgets, and timeframes.
Here are some main loan types offered by banks, online loan companies, and money lenders.
Unsecured loans, also known as personal loans, are not secured against any asset, such as your home. The interest rate is fixed, and repayments are made monthly.
You can choose how long you’d like to repay the loan, but the longer you take, the more interest you’ll pay. The typical repayment term for an unsecured loan is between one and ten years.
They can be a good option if you have a good credit score and regular income. Find out everything you need to know about how unsecured personal loans work here.
This type of loan is secured against your home or property. Your home is used as collateral, which means that if you cannot make the repayments, the equity in your property can be used to cover the debt.
Secured loans are usually used for large loans of more than £10,000. The term is also usually much longer than a personal loan, typically between 5 and 30 years.
The interest rates are often lower than those on personal loans or credit cards, and they can be available even if you don’t have a great credit score. However, it’s important to remember that your home will be at risk if you cannot keep up with repayments.
Here is more information on how secured loans work.
Home improvement loans are designed to be used to make renovations to your property, usually with the aim of increasing its value.
Most home improvement loans are offered on a secured basis, especially if you want to borrow a large amount over a long period. Here's how home improvement loans work.
Car loans are unsecured loans used to finance a car purchase. They’re an alternative to other car financing options such as Hire Purchase or Personal Contract Purchase (PCP).
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 to a contract.
Loans for bad credit are designed for people with poor credit histories and existing bad debts. They’re the same as personal loans but are offered by specialist money lenders with high-interest rates.
An online 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. Here’s more information on how to get a loan with bad credit.
If you’re looking for a way to refinance your 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 struggling to keep track of what you owe, consolidating your debts can be a helpful way to regain control of your finances and rebuild your credit score.
Here’s an in-depth look at how debt consolidation loans work and if they could be the right option for you.
Guarantor loans are a type of unsecured loan where someone else, usually a family member or close friend, agrees to cover your loan repayments if you can’t keep up with them.
They will need to undergo affordability and credit checks, but the loan terms will be the same as those for a personal loan.
Taking out a loan can be a great way to solve short-term cashflow problems or spread the cost of a large purchase.
However, 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.
To get an unsecured personal loan, you need to be able to make payments on time and within the loan term. If you can’t keep up with your repayments you risk:
Incurring fees and penalties that could increase your debts
Hurting your credit score and ability to get further borrowing
Paying higher bank loan interest rates for store and credit cards
Secured loans come with additional risks - if you cannot repay your secured loan, your house could be repossessed.
Getting a loan will not adversely affect your credit rating as long as you keep up with your repayments and always pay them on time.
A personal loan could help you build your credit score and get credit if you can prove you’re a reliable borrower with regular, on-time payments.
This will depend on several factors, such as:
Income and expenditure
Credit history
Type and purpose of loan
When applying for an unsecured loan, lenders look at your income and employment status to assess your affordability.
If you have a regular and reliable income, there’s a good chance you’ll be able to borrow the amount you’re looking for, provided you have a good credit score.
Lenders use your credit history to determine the level of risk they are taking by lending to you. Your chance of approval and interest rate will depend on your credit rating and ability to repay.
If you’ve previously defaulted on a loan or missed payments on credit cards and mobile phone bills, your credit rating will have been negatively impacted.
The maximum you can typically borrow as an unsecured or personal loan is around £30,000. Whether your lender agrees to that amount will depend on your income and credit history.
Lenders can offer secured loans up to £500,000, though this will depend on your home equity and your monthly repayment ability.
A loan can be useful if you’re looking to spread the cost of significant purchases or to fund major projects. Some of the pros of getting a loan include:
Allows you to spread the cost of large purchases over time
Can cover short-term cashflow problems with a low, fixed interest rate
Help you manage your debt in a controlled way
They can finance home improvements to increase the value of your property
Can be cheaper than credit cards or other types of borrowing
Here are some of the pitfalls to watch for when getting a loan:
Defaulting on your repayments could negatively impact your credit score
Your home is at risk if you struggle to keep up repayments on a secured loan
The interest rate (APR) you’re approved for may be higher than advertised
You could incur fees and penalties for late or missed payments
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
Borrowing money should only be used as a last resort. If you can afford to pay for purchases or projects with cash or savings, you should consider using these rather than taking out a loan.
The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.
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If your financial situation changes and you think you’ll struggle to repay your personal loan, contact your lender immediately. They may be able to arrange a repayment break, but check that 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 you may pay a higher monthly amount than before the holiday period.
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 improving it so you can get better credit facilities in future.
It depends on how much you borrow and how long for.
Credit cards allow you to borrow up to a limit that will depend on your credit score.
A 0% purchase credit card or balance transfer card 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.
For most loans, how you choose to spend the money is up to you - popular reasons for borrowing include:
To purchase a car
To pay for a holiday
To fund home improvements
To cover wedding costs
To consolidate debts
To renovate a property
Some low-interest loans may require you to use the money for specific purposes, such as home improvements.
Most loans also specify things you cannot use the money for, including gambling and high risk investments.
There are several options when it comes to applying for a loan, such as:
Online
Via a banking app
Over the phone
In person at a bank branch
If you’re unsure about which loan is right for your circumstances, you may benefit from talking through your options, so applying over the phone or at a branch could be a good idea.
However, if you know what you’re looking for and clearly understand your borrowing needs, you may get the best deal by applying online.
This will depend on where you get a loan. If you apply with your current bank, it’s best to check with them before you apply for a loan.
If you apply with another lender, more loan eligibility checks may need to take place.
You’ll likely need to provide the following documents:
Proof of identity, such as your passport, UK driving license and a bank statement less than three months old
Proof of residence, such as a utility bill less than three 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 may need to meet other eligibility criteria set by the lender. You’ll also need to have a current account that allows you to set up a direct debit or standing order.
All lenders will have different eligibility criteria, but generally, you must be:
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
