What is a loan?
A loan is typically a lump sum of cash that you borrow from a provider which you must pay back in monthly instalments over a set period of time. Once you have made all of those repayments, both the money you borrowed and the interest accrued will be fully paid off.
Loans can be useful if you’re in need of a larger sum of money than other types of borrowing can offer and when used sensibly, can help give you a financial boost right when you need it.
Types of loan
There are lots of different types of loan that can come in useful for all sorts of situations. Match the right loan to your needs to get the most for your money.
Also known as unsecured loans, a personal loan allows you to borrow relatively large amounts (usually up to £25,000) without the need for collateral. In other words, you don’t have to secure the loan against something you own, like your house.
As there’s no security for the lender, you’ll need a good credit score to demonstrate that you’re able to pay off the debt comfortably. That lack of security can also mean the interest rates are higher than on other forms of loan.
Debt consolidation loan
If you have a couple of existing debts with higher interest rates, than it may make sense to consider a debt consolidation loan. These allow you to bring the debts together into a single loan, meaning you only have one repayment to worry about each month. Ideally it will mean you pay less interest overall.
Just make sure you consider any fees for paying off your current debts early.
Bad credit loans
Options may be limited, but it’s possible to take out a loan if you have bad credit. You may need to find a specialist lender though, while interest rates on bad credit loans will usually be high.
In some cases, using a guarantor can help you get accepted for a loan until you’re able to rebuild your credit score.
A secured loan is one that uses an asset, usually your home, as security. This means that if you fail to make your repayments, it could be sold to pay off the debt.
Secured loans enable you to borrow larger amounts and can offer lower interest rates and longer terms than personal loans.
A guarantor loan is when a close relative or friend agrees to pay off the loan if you’re unable to.
It can make borrowing more accessible if you have a poor credit score or haven’t built one up yet and secured or unsecured options are available
Loans may be offered at the dealership where you’re buying your next vehicle.
These dedicated car loans are not always the cheapest way to finance your car purchase though, you may want to think about using a personal loan or credit card instead, if you have a big enough credit limit.
Bridging loans are typically used to fund house purchases and bridge the gap if you want to buy your next home before you’ve sold your current one.
They’re a type of short-term borrowing and can be very expensive.
You should always consider all of your options before taking out a loan, as when used incorrectly, it could make your financial position considerably worse.
For example, if you're looking to buy a car, an alternative to a loan could be to save up instead.
You should only use credit if you have the funds to be able to afford repayments comfortably.
Loan calculator: How much can I borrow?
For personal loans, average lending amounts vary from provider to provider. Most lending providers offer loans between £1,000 and £25,000 but some might offer loans up to £50,000.
This does not mean you'll get the maximum amount from your provider.
When you apply for a loan, the provider will take a look at two main factors: what kind of loan you’re applying for, and your personal financial situation.
They’ll take a look at details like:
- Your income
- Your credit score
- Debt-to-income ratios
- Whether you're securing the loan against your home (also known as a secured loan or second mortgage).
- Why you’re applying for a loan
Find out what your borrowing could look like with our loan calculator.
You can get an estimate of what your repayments will be based on the amount you’re looking to borrow, the term of the loan, and the interest rate.
All you need to compare loans are a few details about yourself and your financesCompare loans
How do I decide which loan is right for me?
With so many different types of loans available, it’s important to work out which one is likely to best meet your needs.
The type of loan you choose will be determined in part by what it’s for. Take a look at the choices above and see which one best fits your needs.
You should also think about your financial situation. For example if you have a poor credit score, it’s less likely that you’ll be accepted for a personal loan.
Once you’ve narrowed it down, you can compare loans with us.
You’ll want to look at the interest rates, and how much you’ll be required to repay each month, as well as any fees or charges.
How to compare loans
Once you’ve weighed up the pros and cons, all you need to do to compare loans is:
Tell us what you’re looking for
Let us know which type of loan you require, how much you need to borrow and for how long
We need to know a little more about you to help match you with the right loans – your name, address and income
We’ll use our smart search to perform a soft credit check, showing you the loans you’re more likely to be accepted for without affecting your credit score
Will I be accepted?
This will depend on your personal circumstances, credit score and the lender’s eligibility criteria, which differs between loan providers.
When you make a full application, you will leave a mark on your credit score. That’s why it’s really important to use our smart search to see which loans you have a higher probability of being accepted for.
Will I get the advertised loan rate?
Lenders display what’s called a ‘representative APR’ when advertising their loans, but there’s no guarantee that you will get that rate, even if you are approved.
Lenders only need to offer the representative APR to 51% of successful applicants. If you are in the other 49% then you could be offered a higher interest rate, and therefore face a more costly loan.
Am I eligible for a loan with bad credit?
You can be approved for a loan even if you have a poor credit score, but you won’t be offered the best rates. In fact, they’ll usually be pretty high and you could be charged fees to offset the risk you pose to the lender.
Depending on your circumstances, you may need to find a specialist lender, alternatively you may want to consider a guarantor or secured loan.
Will searching affect my credit score?
A hard search can affect your credit score – these are performed by lenders when you apply for a loan. While your credit history does not record whether the application was successful or not, if you have a handful of applications close together that will negatively impact your score and therefore chances of getting credit in future.
However, a soft search, like the one we do to find the loans best suited to your circumstances, won’t leave a mark on your credit report. It will be like we were never there!
What will my loan cost?
The cost of the loan will depend on a few different things:
How much you want to borrow.
How long you need to repay the loan in full. The shorter the loan term, the less interest you’ll need to repay, therefore the cheaper it is overall. However, that will mean higher monthly repayments than if you spread the loan over a longer term.
This will not necessarily be the advertised interest rate for the loan. The lender calculates how much interest they’ll charge you based on your income and credit score.
Keeping on top of loans, credit cards and debts
If you have multiple debts across different products, it can feel like fighting a losing battle to keep on top of them.
It’s important to note down all the outgoings you have from your household each month, then you may want to think about prioritising the different kinds of debt and paying off the one that’s costing you the most first. Or you could consider a debt consolidation loan, if possible.
The Money Advice Service can help you to get back on top of your debt and provide you with free advice.
Reporting loan scams
If you think that you may have been a victim of a loan scam, you can report it to Action Fraud.
A loan scam is when a ‘lender’ requires you to pay an upfront fee for insurance on the loan.
Frequently asked questions
Secured loans use an asset as security, like your house. This provides the lender with a fail-safe if you don’t repay the loan. In this case, they can repossess the asset and sell it to cover the debt.
An unsecured loan provides no security to the lender, which means that you’ll need to pass strict affordability checks to ensure that you can comfortably afford your loan repayments. A good credit score is also required to show that you have a history of borrowing and paying off debt responsibly.
It’s really important that you work out the total cost before applying. Not only will this help you to budget, but you can compare taking out a loan against other types of borrowing, like credit cards or using an overdraft.
Check out our loan calculator to see how much it will cost you over the entire term.
Not necessarily, you could be missing out on better rates by not shopping around.
Compare all the options available to you, taking into account how much each loan will cost overall. You can then choose the cheapest option. Just because you’ve been with the same bank for a long time doesn’t mean they have the cheapest rates for you.
Of course, they may do, but it’s always best to check.
It’s possible to repay a loan early but you may be subject to early repayment charges. This could be expensive depending on the loan, so always check whether it’s worth it and if you’ll save any money by doing it.
APR stands for annual percentage rate. This shows you how much the loan will cost you over a year as a percentage. It includes the interest rate, as well as any fees or charges.
Remember that you may not receive the representative APR shown. The lender only needs to give this rate to 51% of accepted applicants to be able to use it for advertising. The other 49% will usually be offered a higher rate.
If you aren’t able to make your repayments, speak to your lender as soon as possible, preferably before you miss any.
They’ll be able to work with you to come up with a solution to ease the financial pressure until you get back on your feet. This could be by adjusting the payment schedule or offering a repayment holiday.
You can also get in touch with a debt charity like StepChange which provides free advice.
Yes, it’s possible to get a loan if you’re on benefits or unemployed. You’ll likely be charged a higher interest rate as you’ll be seen as more of a risk to lenders, and you’ll still need to pass an affordability check to show that you’re able to make the repayments without or on a low income.
A secured or guarantor loan may be options to consider, but you need to be absolutely certain that you can repay the loan, because there’s a lot at stake if you don’t.
Debt consolidation is when you take out a new loan to pay off your other existing debts. It can be used to repay credit cards, store cards, overdrafts or even other loans.
You then only have one repayment to make each month to your loan provider, helping you to keep on top of your debt and hopefully pay it off quicker.
It’s important to only pay off existing debts with an interest rate higher than the loan’s rate to avoid paying more than you need to.