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What is a loan?
A loan, is a financial arrangement where a lender — such as a bank, building society, or online lender — provides a specific amount of money to an individual or a business.
This sum of money, known as the principal, is provided with the understanding that it will be paid back with interest, over a predetermined period known as the term.
There are several types of loans available in the market, each with different features and requirements that are tailored to what you intend to use the money for, and what your financial circumstances are.
When taking out a loan always think about what you can afford to repay comfortably."
Types of loans
These loans are granted (or not) based purely on the borrower's credit score and their ability to pay the money back. You may not be able to borrow as much, but you don't risk losing your assets if you're unable to repay the loan. With a personal loan, you can typically borrow up to £25,000, although some lenders offer loans of up to £50,000.
These require some type of security, such as a car or home, which you borrow against. This improves your eligibility and also allows you to borrow more. But it does put your car or home at risk of repossession, if you're unable to keep up with repayments. With a secured loan you can usually borrow a lot more, up to £1,000,000 or more.
Types of loans
Unsecured loans
These loans are granted (or not) based purely on the borrower's credit score and their ability to pay the money back. You may not be able to borrow as much, but you don't risk losing your assets if you're unable to repay the loan. With a personal loan, you can typically borrow up to £25,000, although some lenders offer loans of up to £50,000.
Secured loans
These require some type of security, such as a car or home, which you borrow against. This improves your eligibility and also allows you to borrow more. But it does put your car or home at risk of repossession, if you're unable to keep up with repayments. With a secured loan you can usually borrow a lot more, up to £1,000,000 or more.
What can I use my loan for?
There are a number of things you may need a loan for. Here are some common reasons people take out loans:
To spread the cost of purchases
To buy a car
If you want to pay off several debts
If you have a poor credit history
To buy a property quickly
To borrow for your business
What are the eligibility requirements to get a loan?
To get a loan you must:
Be at least 18 years old
Be a UK resident
Be in paid employment or have a regular income
Provide proof of identity
Pass a lender’s credit check
Most providers have their own assessment criteria so a particular provider may give more weightage to certain criteria than another.
How to find the best loans
Here are some things you should consider when getting a loan
Check your eligibility
Calculate the amount you need
Compare interest rates
Know how long you need to repay the loan
Watch out for fees
How do I apply for a loan?
You can apply for a loan online, over the phone, by post, or, if applying with a bank, by visiting a branch.
You will also need to provide the following documents for proof identity and income:
Bank details
Current address, and previous address for the past three years
Personal details e.g. date of birth, etc.
Employment details and proof of income
Some sources of income are not accepted by certain lenders when assessing your eligibility. Some examples of these are:
Reimbursement for expenses
Overseas income
Rental income from any buy-to-lets that you own
Student loans
Benefit payments – child benefit, universal credit or jobseeker's allowance (JSA)
How much will your loan cost?
The amount your loan will cost you will be dependent on how much you borrow, the APR, the term you choose, and the fees associated with your loan. Some common types of fees include:
Arrangement fee – pays for the process of approving a loan
Late fee – this is what your lender will charge you for late payments
Broker fee - using a broker will incur a fee for services like negotiations, sales, purchases, communication with lenders, delivery and advice on transactions.
You can use our loan repayment calculator to help you work out what a loan may cost you.
Protecting yourself against scams
In the digital age, it's crucial to be vigilant when seeking unsecured loans online. Scammers often prey on individuals in need of financial assistance. Here are some tips to protect yourself from loan scams:
Verify the lender
Check the lender's credentials and verify that they are authorised and regulated by the Financial Conduct Authority (FCA). You can use the FCA's register to confirm a lender's legitimacy.
Be cautious of upfront fees
Legitimate lenders sometimes ask for upfront fees before disbursing a loan but this could also be a scam. Be cautious if a lender demands payment before providing the loan.
Research reviews
Read online reviews and testimonials about the lender. Legitimate lenders usually have a positive online presence, while scam artists often have negative reviews or no online presence at all.
Never share personal information
Avoid sharing personal or financial information with unsolicited callers or emails. Only provide information to trusted and verified lenders.
Use secure websites
Ensure that the lender's website has a secure connection. Look for "https://" in the website address and a padlock icon or secure symbol in the browser's address bar.
Trust your instincts
If something feels off or too good to be true, trust your instincts and seek advice from trusted financial professionals or organisations.
Be cautious if a lender demands payment before providing the loan.
How to keep up with repayments
Managing loan repayments is essential to maintain your financial stability and protect your credit score. Here's how to handle loan repayments effectively:
Create a budget
Establish a monthly budget that includes your loan repayments. Make sure you can comfortably cover these payments without straining your finances.
Set up a direct debit
Many lenders offer the option to set up a direct debit from your bank account. This ensures you never miss a payment.
Prioritise loan repayments
Make loan repayments a top financial priority. Missing payments can result in late fees, damage to your credit score, and even legal action in extreme cases.
Communicate with your lender
If you encounter financial difficulties that affect your ability to make payments, contact your lender immediately. They may offer temporary solutions, such as deferment or a modified repayment plan.
Avoid additional debt
While repaying your loan, try to avoid taking on additional debt that could strain your finances further.
“Borrowing is an unavoidable aspect of life for millions of us. It could be to buy a car or fund a home improvement project. If you’re looking to borrow, it’s wise to explore all your loan options, and ensure that the amount you borrow is within your means to repay.”
FAQs
Applying online can take minutes if you have your details ready. Some secured loans take longer as the lender will need to value your property.
If your application is approved it could be in your account within 24 hours. However, some lenders take up to 5 working days to transfer the money. It can take several weeks to be approved for secured loans.
This is a credit report check companies conduct to establish how attractive a potential client you are. It’s called a soft search as it doesn’t leave an imprint on your credit report or affect your credit score.
It is the highest interest rate that at least 51% of borrowers will be offered if accepted for a loan. The other 49% or fewer applicants may be offered an interest rate above the representative APR.
No, while most unsecured personal loans offer fixed rates, some secured loans offer variable interest rates that may change.
Most loans can be used for almost any purpose. Some cannot be used to pay other debts, for buying property or land, or for gambling or investing.
Yes you can apply for a loan with someone else, but you will both need to meet the lending criteria and may have to live at the same address.
If you don’t have a strong credit rating or if you are borrowing a substantial amount of money, you may have to secure the loan with an owned asset, such as a car or a property (secured loan).
Some loan providers penalise you if you try to repay your loan early by applying an early repayment charge (ERC).
Generally, the earlier in the term you repay your loan, the higher the charge you may incur.
You could be fined by your lender and it will end any low interest incentives . It can also leave a negative mark on your credit history. This can lead to higher interest rates for any loans you want to take out in the future.
A repayment holiday is when you don’t make repayments on your loan for a period agreed with your lender. These are useful if your personal circumstances change, such as losing your job.
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