Loans. Clearly Explained.

For those of us without cash stashed under the bed loans can be essential. Here’s what you need to know before applying.

Why get a loan?

Most of us don’t have much cash lying around to pay for something in one go, whether that be a new car, making home improvements or even starting a new business. So a loan, if taken out for the right reasons and managed well, can be very useful and improve our lives.

Whatever the reason for loan, make sure you understand the in’s and out’s before you apply. We’ve got the key things to know covered below.

  • Buying a car
  • Paying for a wedding
  • Consolidate existing debt
  • To take a holiday
  • To make home improvements

Shop around and compare loans

Don’t be tempted to walk into your bank on the high street and take the first loan you see. There are hundreds of lenders all competing to loan you money – it’s how they make money.

Your life is perfectly unique, and it’s best to get a loan to match your unique circumstances (and find the best interest rate you can).

Take some time and don't rush, we recommend using an online comparison service who can search the market for you.

To make sure you find the right loan for you we’ve partnered with MoneySuperMarket for a 100% independent recommendation.

  • Highest rated by customers
  • Free to use
  • Won’t impact your credit score
  • Shows chance of being accepted
Find the right loan for you

Types of loans

Personal loans (unsecured)

These are the more common types of loans, and typical for all sorts of purchases, such as cars and weddings. They normally range from a few hundred pounds all the way up to £25,000.

The eligibility and interest rate is based entirely on your personal circumstances, i.e. your income and credit rating, and not ‘secured’ by any asset you have. Secured means putting up something you own as a reserve for the lender to take possession of if you can’t pay the loan back.

Homeowner loans (secured)

A homeowner loan, or secured loan, is typically for large loan amounts, £25,000+, and is backed by your house as ‘security’, which means if you can’t repay the loan, the lender can take possession of your home.

Typically used by those with poor credit. Be very careful when considering this, it’s often better to remortgage and release cash.

Learn more about remortgaging and mortgages.

Bad credit loans

These are loans specifically designed for those with poor credit history, or sometimes just no credit history. Because of the higher risk of people not able to repay the loan, the interest rate is typically higher, and the amount you can borrow is limited.

Guarantor loans

A guarantor is someone who can guarantee you will pay repayments on the loan, meaning they will have to make the repayments if you don’t. They are normally family (not husband or wife), or a close friend, but don’t have to be.

These loans are designed for those with poor credit, but the interest rate is lower as the guarantor is involved too, which reduces the risk for the lender.

Your credit score

Loans are all down to risk for the lender, and whether the maths says they can make money from you or not, so your credit score plays a key role. 

The better your score, the better interest rates you can get. You might also be able to borrow more and the range of lenders willing to lend to you is much higher.

Credit scores can be fairly complicated to first understand, but it’s simply a record of all your credit (your borrowings), and the repayments you make. So if you miss a repayment on any bill, this will affect your score, but if you make repayments on-time, all the time, your score will slowly go up. 

Learn more about credit scores here.