Loan Guide

Taking out a loan is one of the most common ways of bridging the gap when we need money in a hurry. And searching the market for the best deal can significantly reduce the amount of interest you have to pay on that cash. Here, we show you how to find the right loan for you.

What is a loan?

A loan is cash borrowed from a financial organisation such as a bank, building society or specialist lender. Usually repaid in monthly instalments, just like a mortgage, loans can run for anything from a few days to 10 or more years.

What are the different types of loan?

The two main types of personal loans are unsecured, which means the debt is not secured against a property or other asset, and secured.

Unsecured loans are the most popular type and are open to both homeowners and tenants.

Secured loans, on the other hand, are only available to homeowners as they use your property as security, meaning you could lose your home if you fail to keep up with repayments.

They could prove a useful alternative if you are self-employed, have recently changed jobs or have a less-than-spotless credit history, because you are less likely to be accepted for an unsecured loan should this be the case.

Secured loans are also useful for larger amounts or where the applicant requires a longer repayment period – as you can only usually borrow up to £25,000 with an unsecured loan while some secured loan providers will consider lending up to £100,000.

Payday loans, which are designed to help those in need of a sub until their next pay cheque, are another option that generally last for 31 days or less. The interest rates on payday loans are much higher than those on most other types of borrowing and they are therefore sometimes criticised for making borrowers’ situations worse.

However, sensible financial reasons for taking out a loan of this kind include to avoid defaulting on your current account or mortgage, and to pay off more pressing debts, perhaps with an even higher interest rate.

Do I need one?

Loans are often used to cover the cost of big-ticket items such as cars and holidays because they allow you to spread the cost over a number of months or years – while paying interest of course.

It is always a cheaper option to save up for the purchase instead, but a loan could prove the right choice if this is not possible.

If you have a lot of debt built up on credit cards, it is also probable that a loan will prove a cheaper option. Taking out a loan rather than switching credit cards should also help you to work on reducing the debt – as long as you stop using the cards you are using the loan to pay off.

How much will I pay?

The rate you will pay depends on both the deal you pick and your personal circumstances.

Most lenders now price for risk, which means that they examine your credit history – which gives details of your other debts and payment history – before offering you a deal. In this situation, the advertised rate is the typical rate, which must be offered to at least two thirds of those who apply for it.

If you think you may have a less-than-perfect credit rating then avoid applying, and being turned down for, numerous loans, as this will further damage your credit score.

What if I want to pay it off early?

Most loans are subject to Early Repayment Charges, or ERCs. This means that there is a fee if you want to terminate the agreement by paying off the debt before the end of a period agreed at the outset.

ERCs vary from lender to lender, but can be hefty. It is worth checking the penalties imposed for early repayment before signing up as a result – especially if there is a good chance of you having the money to pay the loan off early.

The ERCs on secured loans can often be more costly than those applied to unsecured loans.

Can I protect myself against being unable to pay?

If you are concerned about the possibility of being unable to meet your repayments due to losing your job or falling ill, there is the option of taking out payment protection insurance (PPI) alongside your loan.

This can be taken out with your loan provider, but a standalone provider will usually work out cheaper as you can get cover for all your debts, including the loan in question.

Be sure to check the terms and conditions first to ensure you will be able to claim though, as PPI policies are well known for being riddled with exclusions. It is also worth pointing out that PPI can add hundreds of pounds to the cost of your loan over the term.