If it’s time for a new car or you want to redecorate the kitchen, it’s not always easy to have the money to pay for it. That’s where a loan can be helpful. But with so many different types it can be confusing to know what are the best loans for you. Compare loans and you could get the best rates.
Types of loans
There are two main types of loans - unsecured and secured. These are sometimes called personal loans and homeowner loans.
An unsecured loan is a lump sum of money you borrow but don’t secure against anything. It’s also called a personal loan. If you’re looking to pay off a credit card or make home improvements, getting a personal loan helps you get there. You can borrow it from a bank, credit union, online lender or even a business.
You can borrow up to £25,000 with an unsecured loan, sometimes more, and they tend to last between one and seven years.
If you want a personal loan, your credit score is very important. This is because lenders use it to decide how much money to give you and how much interest to add. Poor credit means higher interest rates or you could even be refused.
A secured loan is often known as a homeowner loan. This is because your debt is secured against an asset, normally property. You must be a homeowner to be eligible and lenders decide how much to lend you against the value of your property.
You can borrow up to £100,000 with a secured loan and they tend to last for up to 25 years. If you fail to repay the loan, the provider can repossess the asset linked to the loan and sell it. This is why it’s important to know whether you can keep up the payments on a secured loan.
What other loans are there?
Bad credit loans
A bad credit loan is for people with a low credit score. It usually has a higher interest rate and more restrictions compared to other loans. They tend to be more expensive but have a higher approval rate. They can even help improve your credit score if you meet the repayments.
Guarantor loans are another type of loan for people with bad credit. With a guarantor loan, you can have a family member or friend be a guarantor for the loan. If you miss any repayments, it’s their responsibility to pay it. This makes it easier for people with a poor credit history to get one.
Debt consolidation loans
A debt consolidation loan lets you combine all your debts into one. This helps to reduce your monthly outgoings and save on interest payments. For example, if you have three loans and two credit cards that total £15,000 in debt, you can get a single £15,000 loan to pay them off.
Our money expert Salman Haqqi says:
"Borrowing isn’t bad. When used in a responsible and planned way, it can be a useful tool to manage your money. It just means paying for anything that brings value to your life. This could be your first home, wedding or a dream holiday. Find cheap loans with the lowest possible interest rate, then make sure you can afford to pay back your debt and have a plan for how you're going to do it."
What are the pros and cons of a loan?
|Having a loan and making the repayments will build a good credit score||It normally means you need a good credit score, unless you pay more interest|
|Consolidate lots of debt into one and make it easier to manage||If you miss a payment, it will lower your credit score|
|Most loans have fixed payments, which means you know how much to pay each month||Getting a loan with a high interest rate means paying back a lot of money you haven’t used|
|Loans normally have a lower interest than credit cards||It encourages you to spend beyond your earnings|
|You decide how long you want to pay the loan for so it benefits you the most||You could spend a long time paying a loan back when you only use the money for a short time e.g. a holiday|
What is APR?
Annual Percentage Rate (APR) tells you in a percentage how much you have to pay back, on top of the money you borrowed. The APR helps you decide if it’s the cheapest loan for you because it includes the interest rate and any other fees or charges.
You may also see the term ‘representative APR’. This is the APR that is given to at least 51% of borrowers looking for a cheap loan, but it doesn’t mean everyone will be offered it. It depends on your credit score and borrowing history.
Loans vs credit cards
Whether you should take out a loan or apply for a credit card depends on several factors. These include the amount you want to borrow, for how long and why you’re borrowing.
Credit cards are for short-term borrowing. This is useful for balances which you can pay off each month. This is often cheaper because many credit cards offer interest-free periods.
Loans are more structured. You get a cash sum and then repay it, with interest, over a period of time. This helps you to borrow more money, so if you’re looking for more money you should consider a loan.
How do I find the best loan?
If you’re thinking of getting a loan, shop around and compare your options to get the best deal. Consider the following features:
Eligibility: Knowing what you are eligible for can help you save time and avoid applying for loans you can't get.
Amount: Make sure the amount you are allowed to borrow covers your needs. You also need to be able to afford the monthly repayments.
Interest: Lenders offer an interest rate based on your credit history. Different lenders will offer different rates.
Time: The longer you have the loan, the smaller the monthly repayments. But you'll normally pay more in interest.
Fees: Some lenders may charge fees if you pay the loan back early or make an extra repayment.
What do I need to compare loans?
Our loans tables show you the provider, product, representative APR, loan amount and the time it takes to pay it back.
You need to know how much you want to borrow, how long you want to borrow for and how much you can afford each month. Then you can compare the different loans available. Our loan calculator could help you work out the costs here.