A loan is a borrowed sum of money that the lender, such as a bank or building society, lends you with the expectation that it will be paid back with interest (i.e. the cost of borrowing the money) on top. This means when you take out a loan, you will pay back more than you borrow.
There are many different types of personal loans to compare, so it's important to know how they all work before you borrow money. With a better understanding of loans, you can save money and make informed decisions about debt – including when to avoid it. Not all loans are suitable for everyone, so it's vital to do your research and compare loans to find the one that best suits your needs.
What are the different types of loans?
There are mainly two types of loans:
Secured loans: These require some type of security, such as a car or home, which you borrow against.
Unsecured loans: These loans are granted (or not) based purely on the borrower's credit score and their ability to pay the money back.
All other types of loans are versions of these to basic types, and vary in features and terms based on the purpose if you loan.
If you want to spread the cost of a large expense ...
A personal loan is a good option if you want to fund a holiday or an home improvement project. They let you borrow a fixed sum of money and pay it back in fixed monthly instalments.
If you're looking to buy a car ...A car loan is a loan you take out specifically to buy a car. It is similar to a secured loan in that the money you borrow is secured against the vehicle you intend to purchase. If you default on your repayments, the lender can seize the vehicle.
If you want to buy a property quickly ...
Bridging loans help you to ‘bridge the gap' when you need to pay for something but are waiting for funds to become available. For example, bridging loans are often used by people who are buying a property, but are waiting for the sale of another property to go through. Bridging loans tend to be secured loans, so you will need a high-value asset to get one, such as property or land.
If you need to borrow for you business ...Business loans are similar to personal loans, but are specifically designed for business use. You are lent a certain sum of money over a period of years – again, subject to affordability and a credit check – and pay it back with interest. A business loan can be secured or unsecured.
If you want to pay off debt ...
Debt consolidation loans allow you to borrow money to pay off several different existing debts, e.g. credit cards, or overdrafts. Combining these different debts into one means there is only one monthly repayment to make, instead of several. This can help make things easier and manageable for some people - allowing them to keep track and manage their cash flow and debts.
How to find the best loans?
If you want to get a loan, it’s important to shop around. Doing a loan comparison will mean you can compare loans and find cheap loans that meet your needs.
There are a few features to think about when you’re looking:
Eligibility: It’s best to work out what you’re likely to be accepted for before you apply. It’ll save you time and it means your credit rating won’t be affected by applying and being rejected.
Amount: Work out how much money you need. You’ll also need to make sure you can afford the monthly repayments.
Interest: You’ll be offered an interest rate based on your credit history. Different lenders will offer different rates so you’ll need to pick a rate that works for you.
Term: The longer you spend paying your loan back, the smaller the monthly repayments. But you'll normally pay more in interest if you take a long time to pay it back, even with the cheapest loans.
Fees: Even when you think you’ve found the best loans, check the small print. Even the best loan companies can charge fees for paying the loan back early or making an extra repayment.
Where can you get loans in the UK?
There are a variety of different places to get loans. UK providers include:
Internet loan providers
Supermarkets and high-street stores
Secured loan providers
You should always shop around to find a loan provider that can offer the best deal for you and your circumstances. Try to calculate how much you will be spending over the term of the loan.
Be aware that short term loans (also known as payday loans) are a very expensive way to borrow money. Advertised APRs are often in triple digits, so it can be incredibly easy to fall into a debt spiral and seriously damage your credit record. It is best to avoid them and you can read more about why you should avoid payday loans here.
Who can get a loan?
You must be at least 18 years old to apply for a loan in the UK. In addition, you normally have to:
Be a UK resident, with proof of address
Provide proof of your income to show the lender you are capable of paying back the loan
Pass a lender’s credit check
Keep in mind that these are not the only considerations lenders make when assessing your eligibility. Most providers have their own assessment criteria so a particular provider may give more weightage to certain criteria than another.
How much can you borrow?
Loan companies will assess how likely you are to be able to repay your loan. UK providers will judge the amount you can borrow and the interest rate you receive will be based on this assessment, which factors in your income, your financial assets (savings, investments, possessions of value, etc.) and your credit history.
It also depends on the kind of loan you get. For example, if you get a personal loan, you can typically borrow up to £25,000, although some banks and loan providers may be willing to go up to £100,000.With a secured loan you can usually borrow a lot more, up to £250,000 or more.
How much will your loan cost?
The amount your loan will cost you will be dependent on the APR that you agreed to when you took out your loan.
You are more likely to pay a higher rate of interest on a debt of just a few thousand pounds than you would on a larger debt. As larger loans typically have lower APRs, some people consolidate different debts into one large one in order to try to obtain a better rate and save money overall.
Be aware that some lenders may charge upfront fees, and may include early repayment charges (ERCs) in their terms should you want to repay the debt early. Before taking out any loan, make sure you understand what the additional costs will be. Some common types of fees include:
Application fee – pays for the process of approving a loan
Processing fee – similar to an application fee, it covers the costs associated with administration
Origination fee – the cost of securing a loan (common for mortgages)
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.
How to know if you will qualify for a loan?
A lender will only provide a loan if they are reasonably certain it will be repaid. As your credit score helps lenders determine your level of risk, improving that score will help you qualify. Generally, the higher your credit score, the more likely you are to qualify for a loan. Your credit score may also impact the interest rate you're offered.
You will need to present proof that you have sufficient income to repay the money borrowed, plus the interest and additional fees.
How to apply for a loan, UK wide
When you ask a lender for any kind of credit, you will have to go through the application process. However, before you apply for a loan, it is important to review your credit report and your credit score so you can better understand what lenders might see when they pull up your details.
In general, 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 the following paperwork and proof of identity:
Current address, and previous address for the past 3 years
Personal details e.g. date of birth, etc.
As part of your loan application, you will have to include your salary and monthly income. Some income sources are not accepted by certain lenders. The following could be examples of incomes that lenders do not accept:
Reimbursement for expenses
Maintenance payments from an ex-spouse or partner
Rental income from any buy-to-lets that you own
Benefit payments – child benefit, universal credit or jobseeker's allowance (JSA)
You will usually be required to provide your three most recent bank statements and payslips that can prove your earnings along with your application.
What if I'm self employed?
If you are self-employed, you will need at least one full year of audited accounts to apply for a loan. Depending on the lender, you may be asked for more, and some lenders may even exclude self-employed earnings altogether from their assessment. Make sure you check the requirements before you apply to save you time and reduce the chance of a rejection.
Things to consider before getting a loan
Before taking out a loan, you need to spend time to compare loans to figure out which one will work best for you and your circumstances. You then have to assess whether you can afford the loan, and know how you intend to meet your monthly payments.
Taking out a loan, or any form of credit, should never be a quick and uninformed decision. Failure to repay an unsecured loan will result in additional interest and late fees added to the loan. Worse – it will make it harder to repay the money you owe, and the lender can apply to have a county court judgement (CCJ) or bankruptcy order made against you. Among other consequences, this will have a hefty impact on your credit score, making it extremely difficult to secure a loan in the future.