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Types of loan

There are several types of loan you can choose from, including:

Personal loans

Personal loans are a type of unsecured loan. This means the borrower doesn’t need to put forward any collateral, or security, to qualify for the loan.

As the name suggests, these loans are designed for personal use and borrowers often take them out to pay for a new car, home improvements, holidays, special events, emergency expenses or debt consolidation, for example.

You can typically borrow up to £25,000 (although larger loans may be available), which you then repay over an agreed number of years. You pay off the loan, and the interest charged, in monthly instalments.

If you have a poor credit history, there are loan companies that specialise in offering bad credit loans. These are standard personal loans, but they often charge a higher rate of interest than if you had a good credit score. See our chart to compare bad credit loans.

Note that guarantor loans are a specialist type of personal loan. They work in the same way as a standard personal loan, except the borrower can name another individual as a guarantor who agrees to repay the loan if the borrower can’t. Guarantor loans may be particularly appealing to those with poor credit histories who may not be eligible for a standard loan.

Secured loans

Unlike personal loans, secured loans require some form of security, such as your home or another item of value.

This could help you to borrow a larger sum over a longer term and access lower rates of interest, but the item you put forward as security is at risk if you fall behind on repayments. The lender is entitled to repossess your property (or the item used as security) to get back any money owed.

Bridging loans are a specialist type of short-term secured loan. See more on our bridging loans page.

Car finance is a type of secured loan that uses a vehicle as security.

Business loans

Business loans can be unsecured, which means they don’t require any form of collateral, or secured, which means the business needs to use their premises or another item of value as security for the loan.

There are a wide variety of business loans available, designed to suit a range of businesses and requirements.

Bear in mind that the Financial Conduct Authority (FCA) doesn’t regulate business loans (with some exceptions). By contrast, all lenders offering secured or unsecured loans for personal use need to be regulated by the FCA.

See our guide on business loans vs. personal loans.

What to consider before taking out a loan

It’s important to ask yourself a number of questions before taking out a loan, including:

• Do you need it? Just because you’re eligible for a loan, doesn’t mean it’s necessarily the best decision for you. Think about whether you really need it, or if you can afford to wait to save up the money instead, for example.
• How much do you need to borrow? Work out how much you need to borrow and only take out a loan to cover the sum you need. You pay interest on your loan, so the more you borrow, the more interest you’ll need to pay.
• How long do you need to make repayments? It’s important to choose a repayment term that works for you. The longer the repayment term, the smaller your monthly payments will be. However, a longer repayment term means you’ll pay more interest overall, so it’s worth choosing as short a term as you can afford.
• How much does it cost? Compare loans and their interest rates to make sure you choose the most affordable option. You can use our loan calculator to see how much your monthly repayments would be and how much you’d pay overall, depending on the interest charged.
• Are you eligible? Before applying for a loan, it’s a good idea to check whether you’re eligible as this can minimise the chances of your application being declined. You can check your loan eligibility without affecting your credit score.
• Is the lender authorised? It’s always worth double-checking that a lender is authorised by the Financial Conduct Authority (FCA) and that it isn’t a loan shark (illegal lender) or a scam.

How to get a loan

As a minimum, most lenders will only accept applications from UK residents aged 18 or over. However, each individual lender will set its own eligibility criteria and may require a minimum income, for example.

You can apply for many loans online, although you may be able to apply for some in branch, via app or by phone.

It’s worth comparing loans and checking your eligibility before applying for a loan to ensure you choose the most suitable one for you.

Whatever type of loan you apply for, the lender will need to know some key details, including your:

• name and address
• contact details
• employment status
• residential situation (renting, homeowner, living with parents etc)
• income
• regular monthly expenses (rent or mortgage payments, for example)

When using a loan comparison service or applying for a loan, you’ll also need to say how much you want to borrow, the term you want to borrow over and what you plan to do with the money (if approved).

Bear in mind that if you’re applying for a secured loan, you’ll typically need to provide more in-depth information than for an unsecured personal loan.

Once you’ve filled in the required information, the lender will assess your application and run a hard credit check as part of the process. This check will be recorded on your credit report.

Don’t submit multiple loan applications (or any other applications for credit) within a short space of time as this could affect your credit score.

How do lenders determine how much I can borrow?

Many factors affect the amount you can borrow, including your:

• income
• regular expenditure (including rent or mortgage payments and bills)
• existing debts
• employment status (whether you’re self-employed, for example, and how stable your employment is)
• credit history.

When taking out a secured loan, the value of the property put forward as security will also be a crucial factor in how much a lender will offer you.

Lenders will look at the above information to work out how much you can afford to repay, and so how much you can borrow.

How quickly can I get the money after approval?

Depending on the lender and your application, you may receive a decision within a few minutes. The lender may then be able to transfer the loan to your account within a couple of hours , although other lenders may take one day or longer.

Can taking out a loan affect my credit score?

Applying for a loan can affect your credit score as lenders will typically conduct a hard credit check as part of the application process.

A hard check is recorded on your credit file and may temporarily affect your score but, as long as you make all your repayments on-time, your score should start to improve.

Your credit score is more likely to be negatively affected if you make multiple applications for credit (and so have multiple hard checks) within a short period of time. Moreover, bear in mind that any missed or late payments, or defaulting on the loan, are likely to harm your credit score.

See our guide for tips on how to improve your credit score.

Are there alternatives to loans?

Before applying for a loan, it’s worth considering some alternatives to see if they could be a more suitable option.

• Credit cards can be more flexible and cheaper than a loan for borrowing smaller sums over a short period, as long as they are managed effectively.
• Remortgaging and borrowing slightly more on your mortgage could be an alternative to a secured loan, although it’s important to consider the potential downsides to this and to seek advice if you’re unsure.
• Car finance may be an option if you were thinking of using a loan to pay for a new vehicle.
• Buy now, pay later can help to spread the cost of smaller purchases and, if you pay it off in full before interest charges apply, it won’t cost anything.