If you need a new car, want to make home improvements or go on a holiday you might need to borrow money if you don’t have savings you could use.
Whether you need a loan, or a different credit product, will depend on what you're borrowing for, how much you need to borrow and for how long.
For example, if you you're looking to borrow less than £5,000, you might want to consider a credit card. Or if you simply need a cushion to occasionally cover unexpected expenses, an overdraft might be better suited to your needs.
For larger amounts and longer term borrowing, loans are usually the cheapest way to borrow money.
Types of loans
There are so many different types of loans available, it can be confusing to know what the best loans are for your needs.
So before you go hunting for cheap loans, you’ll need to think about what kind of loan you want. There are two main types of loans. There are unsecured loans which are sometimes known as personal loans. And there are secured loans which are sometimes called homeowner loans.
An unsecured loan or personal loan is where you borrow a lump sum of money, but it isn’t secured against anything you own. It’s useful if you want to pay off a credit card, make a big purchase or do some home improvements. You can get a loan like this from a bank, online lender, or even a business.
Unsecured loans are a way of borrowing up to around £25,000, although some lenders may let you borrow up to £50,000. You’ll usually need to pay your unsecured loan back over one to seven years.
To get the best loans at the best loan rates, it’s important that you have a good credit score. When you want a personal loan, UK lenders will use your credit rating to decide whether to offer you a loan. They’ll also use it to decide how much money to give you and how much interest to charge. If you’ve got poor credit you could be refused, or you might be offered a loan with a higher interest rate rather than the best loan rates out there. Find out more about how your credit score affects your loan eligibility here.
Secured loans are sometimes called homeowner loans. That’s because your debt is secured against your home, or another large asset you have. You can’t get a homeowner loan unless you’re a homeowner.
Lenders decide how much you can borrow with a secured loan based on the value of your home. But it could be up to £100,000 over up to 25 years.
With a secured loan, if you can’t repay it, the lender can repossess the asset that’s linked to the loan and sell it to recoup its funds. That’s why it’s important to be sure you can keep up the repayments on a secured loan before you take one out.
Can I get a loan if I have bad credit?
It can be difficult for you to get the best rate loans if you have bad credit, but it doesn't mean you can't get a loan at all. Although options may be limited, many lenders offer loans that cater especially to those with bad credit.
Bad credit loans
If you need to get a loan but have bad credit, a bad credit loan could be right for you. But these aren’t low rate loans. These loans usually have higher interest rates and lower credit limits. They’ll cost you more, but you’ll be more likely to be accepted than with other types. If you get one and make the repayments consistently, it can help to improve your credit score.
A guarantor loan is another type of loan for people with bad credit. With these, you have a friend or family member who agrees to be a guarantor. That means that if you missed a payment, it’d be their responsibility to pay. This makes it easier for people with poor credit history to get a loan.
Can I use a loan to pay off debt?
Paying off debt is a common reason many turn to loans. This is why many lenders offer loans that help people pay off their debt quicker.
Debt consolidation loans
If you’ve got lots of different debts, you might like to think about getting a debt consolidation loan. These let you combine all your debts into one.
Here’s an example. If you have three loans and two credit cards which total £15,000 in debt, you could take out a single debt consolidation loan to pay them off.
By doing this, you’ll reduce your monthly repayments and save on interest. A debt consolidation loan can be the best loan for someone with lots of debts to manage.
What are the pros and cons of a loan?
|Having a loan and making the repayments will build a good credit score||You’ll need a good credit score to get decent loan rates|
|You can consolidate lots of debt into one so it’s easier to manage||Missing a payment will affect your credit score|
|Most loans have fixed payments, so you’ll know much to pay each month||If you can’t get the best loan rates, you’ll end up paying back a lot more money than you’ve used|
|They normally have a lower interest than credit cards, especially if you find a cheap loan||Loans can encourage you to spend beyond your earnings/td>|
|You decide how long you need to pay the loan back, based on what’s best for you.||Loans can encourage you to spend beyond your earnings|
What is APR?
APR stands for Annual Percentage Rate. It tells you, in a percentage, how much you’ll need to pay back on top of what you’ve borrowed.
It’s a quick way of working out whether you’re looking at the best loan deals for you, because it includes the interest rate as well as any other fees or charges.
When you compare loans from the best loan companies you’ll probably also see the term ‘representative APR’ being used a lot. That means the APR you see is the APR given to at least 51% of borrowers looking for cheap loans. But not everyone will be able to get that bank loan at that rate. The loan rates you’re offered will be based on your credit score and borrowing history.
Loans vs credit cards
When you’re trying to decide whether to find cheap loans or low APR credit cards, there are a few factors to think about. These include how much you want to borrow, for how long, and why you want to borrow money.
Credit cards are good for short-term borrowing. It’s good if you can pay them off in full each month. And it can work out cheaper because many credit cards give you an interest-free period.
Bank loans are a more structured way to borrow money. You’ll receive a lump cash sum and then repay it, with interest, over a set period of time. You can borrow more money with a loan so if you need a lot, it’s a good idea to start looking for the best loans available.
How do I 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 the cheapest 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 find the best loan company for you.
Time: 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. Some lenders charge fees if you pay the loan back early or make an extra repayment.
What do I need to compare loans?
Doing a loans comparison is good way to see, at a glance, a range of different lenders and the loans they offer.
Our loan comparison table shows you the representative APR, and an example of a loan amount and how long it would take to pay it back.
When you start to compare loans you’ll need to know how much you want to borrow. You’ll also need to know how long you want to borrow it for, and how much you can afford to pay back each month. Then you can compare loans and the different benefits of each.
You can also use our loan calculator to work out the costs to you of taking out the loan.