What is a loan?

It is where you borrow money from a financial organisation and pay it back over a set period of time.

What can you use a loan for?

Most loans can be used for almost anything, but some types of loans are designed to be used to buy certain things, like vehicles.

Pros and cons

  • Good for long term borrowing

  • Interest rate often fixed

  • Could borrow a large sum

  • Can take less than 48 hours

  • Charges for paying back early

  • Some loans require security

  • Repayments are less flexible

  • Need good credit for best rates

How they work

If you apply for a loan and are approved by the lender they will transfer the money directly into your bank account.

You then pay back the loan, normally every month, until the balance is paid off.

How long do you get to pay it back?

You can decide how long you need to pay your loan back before you apply.

With most loans you can choose to spread your payments over one to five years, but some:

  • Allow you to pay it back quicker to save you money

  • Allow you to spread the payments over a longer time period

While choosing a longer time period will make your monthly payments smaller, it will also make your loan more expensive.

How much can you borrow?

You could borrow between 1,000 and 25,000 with most types of loan, but some do offer smaller amounts or much larger sums.

  • Smaller loans tend to be over shorter time periods, usually a year or less

  • Larger loans usually last at least three years, but can be anywhere up to 25 years

Where can you get a loan?

Lots of different businesses now offer loans in the UK, including:

  • Banks

  • Building societies

  • Charities

  • Credit unions

  • The government

  • Peer to peer websites

  • Supermarkets

Who can get a loan?

You must be 18 or over to apply for a loan in the UK, because this is the age you are legally allowed to borrow money.

You normally have to be:

  • A UK resident

  • Able to pay back the loan

This means lenders normally ask you for:

  • Proof of your address

  • Proof of your income

  • Permission to check your credit record

Can you get a joint loan?

Yes, you can apply for a loan with someone else. For example, if you and your partner own a home and want to borrow money for a new kitchen.

If you choose to do this the lender will assess the personal and financial details of both you and the person you are applying with.

You can take out a joint loan with almost anyone, but you usually both have to be over 18, UK residents and be able to show you can pay back the loan.

What do they cost?

Most lenders charge you interest when you take out a loan. This is a percentage of the money you owe for the duration of your loan.

Some also charge other fees in addition to the interest rate, including:

  • Broker fees

  • Extra fees for transferring your funds quicker

  • Late or missed payment fees

  • Payment protection insurance

What is APR?

Lenders usually display their rates annually as an annual percentage rate (APR) which is the total cost of borrowing over 12 months.

The APR must include all the standard costs of getting a loan, including any application fees charged by the lender.

Any charge that the consumer must pay to obtain credit must go into the APR calculation.

Source: Financial Conduct Authority handbook

Lenders must show a representative APR before you apply for a loan. This is the interest rate that at least 51% of successful applicants will get when they apply.

The rest could be offered a higher interest rate by the lender.

This means that you may not get the advertised interest rate when you apply for a loan.

What will your repayments be?

With most loans you pay back the same amount every month because the interest rate is fixed for the duration of your loan.

What types are there?

There are lots of different types of loan, but all of them fall into one of two categories:

  1. 1.

    Secured loans that are tied to something you own like your property. They tend to be for larger sums and over longer time periods.

  2. 2.

    Unsecured loans that are not associated with any of your belongings directly. They tend to be for small to medium amounts and last between one and five years.

Loan FAQs

Q

What are repayment periods?

A

This is how long you have to pay back you loan. Try to choose as short a period as you can that still keeps your repayments affordable.

Q

How will I get my loan?

A

Most lenders will transfer the money straight into your bank account. However, vehicle finance pays your loan straight to the car dealership.

Q

How often can I borrow?

A

There are no set time limits, or restrictions on the number of loans you can have. However, applying for lots of loans could damage your credit record.

Q

Where can I get a small loan?

A

If you want to borrow less than 500 you may need to look at alternatives to a loan, like a credit card or overdraft. Here are 4 ways to borrow a small sum.

Q

Where is the best place to get a loan?

A

The best place lets you borrow the money you need, over a time period that suits you all for the cheapest cost. Compare loans here.

Q

Do you pay extra if you repay a loan early?

A

Yes lenders can charge up to 58 days interest if you repay your loan early. But you also save money on the interest you would have paid during the loan.

Q

Is it harder to get a loan if you are young?

A

It can be if you have never borrowed before so have little credit history. This is because you do not have a proven track record managing your borrowing.