Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
If you need to borrow money, such as to make home improvements, buy a car or consolidate other debts, there’s a range of loan types to choose from.
The one that’s right for you depends on how much you need to borrow, what you need it for, how quickly you can pay it back and your circumstances. You might only be eligible for certain types of loan – because you have a poor credit history, for example.
Once you’ve explored your options and decided which type of loan you should go for, you can then start shopping around for the cheapest deal.
All loans broadly fall into two categories – secured and unsecured. With both types you’ll pay the loan back over an agreed period, usually monthly, with interest, and you’ll have to meet certain criteria to satisfy the lender that you can afford to pay back the loan.
The interest rate you’ll pay will depend on the loan amount, your credit history and other factors. You can read more about how your credit record affects the loan you get.
With a secured loan you provide an asset, usually your home, as security for the loan. Loans secured on your home are also called homeowner loans. If you can’t repay a secured loan, the lender is entitled to sell the asset to get its money back.
As the risk to the lender is reduced by having this security in place, interest rates are usually lower than for unsecured loans and you can borrow larger amounts and spread the cost over longer periods.
Loan amounts generally start at £10,000 and you can borrow up to £1,000,000 or more, and pay it back over three to 35 years.
A mortgage is also a type of secured borrowing.
You don’t provide security for unsecured loans. Instead, the lender assesses whether you will be able to afford pay back the loan by looking at your credit history and other factors.
As there’s more risk involved for the lender than with a secured loan, it’s likely you’ll pay a higher interest rate for an unsecured loan – also known as a personal loan – and they are harder to get if you’ve had credit problems in the past. There’s less risk to you, however, as there’s no chance of you losing your home or any other asset you’ve offered as security.
You can usually borrow between £1,000 and £25,000 – more in some cases – with an unsecured loan and pay it back over one to seven years.
For more read our guide to the differences between secured and unsecured loans.
If you don’t have the cash available to buy a car outright you have a number of options. You can take out a personal loan to buy a new or used car and own it straight away.
With specialist car finance, which includes hire purchase, personal contract purchase and personal contract hire, it’s usually secured against the vehicle you’re buying and you either don’t fully own it until the agreement ends or you never own it.
Read more about your car finance options.
Logbook loans are a type of loan secured on a car you already own where you give up ownership of it until the loan is repaid. You can still use the car during the loan period. Logbook loans are an expensive form of borrowing.
If you’ve had credit problems in the past, such as bankruptcy or county court judgments, or you’ve missed payments or defaulted on loans, lenders may be reluctant to lend to you as they see you as a risky borrower.
You can also struggle to get a loan if you have no credit history because you’ve never taken out credit before so have no track record.
Having a poor credit rating doesn’t necessarily mean you won’t be able to get a loan but you’ll pay a higher interest rate and have fewer lenders to choose from than someone with a good credit history. The amount you can borrow may also be affected.
But there are loans available that are specifically designed for people with bad credit, usually from specialist lenders. A secured loan is likely to be easier and cheaper to get, where you provide an asset such as your home as security for the loan, than an unsecured one. A guarantor loan could also be an option.
The good news is that if you are able to get a loan and make the repayments on time every month, this will actually improve your credit score and allow you to take out credit on more favourable terms in the future.
Find out more about how to borrow money with bad credit.
If you can’t get a loan because you have a poor or no credit history, a guarantor loan could help. This means that somebody else, usually a parent or other relative, guarantees that they will make the loan repayments if you can’t.
Your guarantor must be at least 21 years old and have a good credit history. You’ll both have to show that you can afford to pay the loan back when you apply.
Find out more about how to get a guarantor loan.
If you have multiple debts across different loans, credit cards and overdrafts, for example, you can take out a new loan to pay the others off with the aim of simplifying your payments and saving money.
The debt won’t disappear, but if you’re able to get a loan with a lower interest rate than those on your current debts, it could be cheaper overall. You’ll also only have to worry about making one payment each month.
There are two reasons why you might want to take out a debt consolidation loan.
It’s important to do your sums to make sure you really will be saving money before you decide to consolidate your debts in this way. If you’re paying off the debt over a longer period than before it could cost you more in the long run, even if the interest rate is lower. You should aim to pay it off as quickly as you can comfortably afford.
As part of this,Make sure you factor in any set-up fees for the new loan and any charges for paying off your other debts early.
Another reason to get a debt consolidation loan is to make your monthly payments more affordable. If you’re doing this by spreading the repayments out over a longer period you may not save money in the long run, but it could still be worth doing to reduce the risk of you falling behind.
You can get a secured or unsecured loan for this purpose but although secured loans are usually cheaper and easier to get if you’ve had credit problems in the past, they’re more risky as you could lose your home if you can’t make repayments on time.
These are short-term loans that let you borrow a small amount of money quickly. They should be avoided if possible as they are very expensive, with interest rates often in triple digits or even higher, and can suck you into a spiral of debt. They are generally a last resort for people who can’t get a loan elsewhere.
Visit our guide to why you should avoid payday loans for more information.
Credit unions bring together people with a common bond, such as they live or work in the same area, belong to the same organisation or work for the same employer. Members’ savings are pooled to lend to one another on a not-for-profit basis.
If you’re eligible to join one, you can get loans at relatively low interest rates if you meet certain criteria. They offer both secured and unsecured loans.
Visit Find Your Credit Union to see if there’s one you can join.
Peer-to-peer lending platforms match individuals who have money to invest with people or businesses who want to borrow. They can provide good returns for investors, although there is a risk that you could lose your money, and offer credit at lower rates for borrowers.
The biggest peer-to-peer lending sites are Funding Circle and Zopa.
A home improvement loan is any loan taken out to pay for work on your home, such as refurbishing your property or building an extension. Most loans can be used for this purpose.
If you only need to borrow up to £25,000 and can afford to pay it back in seven years or less a personal loan may be your best option. If you need to borrow more you’ll need to take out a secured loan where your home or another asset is used as security. You’ll also usually get a lower interest rate with a secured loan.
Another way to borrow money for home improvements is to borrow more on your mortgage, which could turn out to be the cheapest option, so it’s worth considering this first.
Otherwise known as mortgages, home loans are specifically used to buy a home, although mortgages can be used to buy any type of property. They are secured on the property itself.
You pay back the loan with interest over the mortgage term, which is often 25 years when you first take it out, although it can be shorter or longer. You normally get an introductory rate at the beginning of your mortgage that lasts for two to five years. This can be fixed or variable.
Once the introductory rate ends, your rate will revert to the lender’s higher standard variable rate so it’s usually best to switch to a new deal at this point.
Visit our mortgage guides to find out more.
Bridging loans, which let you borrow money you only need for a short period, are another type of loan that is often secured on property.
If you need finance for your business – to take on new staff or move to bigger premises, for example – you can take out a business loan. You can usually borrow between £1,000 and £15 million and pay it back over one to 25 years.
Business loans can be secured or unsecured and often work in much the same way as loans to individuals but there are also other types, such as invoice finance, which lets you raise money by selling your unpaid invoices or borrowing against them.
Find out more about how business loans work.
If you can’t get a loan, other options include:
Credit cards – you won’t pay any interest if you pay the card off in full each month. Alternatively, you could take out a 0% on purchases card, which won’t charge you interest for an introductory period.
Overdrafts – these can be arranged quickly on your existing bank account and are useful for borrowing for short periods. Some banks don’t charge you interest for borrowing small amounts or you can take out a new bank account that gives you a free overdraft for a limited period. Otherwise, you may have to pay for dipping into your overdraft – many banks charge a standard overdraft interest rate of 39.9% EAR (equivalent annual rate).
Pawnbroker loans – you hand over something of value, such as jewellery, as security for a loan. You pay it back with interest in a lump sum, usually after at least six months, and then get your item back. This is a more expensive way to borrow than with most other types of loan but cheaper than using a payday loan.
Borrowing from friends or family – this could be a cheap, quick and flexible option if you have friends or family who are willing to lend to you, but make sure everyone involved is clear about whether interest will apply and when you’ll pay the loan back.