How To Choose The Best Loan For You

You’re definitely not short of choice when it comes to the world of loans. There are different types, different amounts, different interest rates and different lending criteria to consider. So while that makes your job of choosing a little bit trickier, at least you know the perfect loan for you is out there somewhere… you just have to find it.

To help you do just that, we’ve created this guide! We’ll be discussing everything you need to know about the five most common loan types, from the pros and cons to the expected APR and any borrowing restrictions – helping you to find your ideal loan match! Right, let’s dive in!

Payday loan

A payday loan is a type of short-term borrowing that allows you to borrow relatively small amounts of money for a few weeks or months. You can apply for them online, and many lenders boast they can have money to you in under an hour. This is handy in an emergency, but comes at a cost. In fact, payday loans have one of the highest costs of any other loan on the market. The cost of payday loans is capped in the UK, so you’ll never repay more than twice the amount you borrow when interest and fees are accounted for, too. But, this is still extremely expensive borrowing and results in APRs that can be as much as 1,500%, and shows just how costly this type of borrowing is compared to others.

Personal loan

Also known as an unsecured loan, a personal loan lets you borrow anything from £1,000 to £25,000 over a short to medium term of between 1 and 10 years.

The interest rate on this type of loan can vary anywhere from 2% to 36%, with the average coming in at around 8.4%However, the actual interest rate you’re offered will usually come down to your affordability and your credit score. The better your score, the lower the interest rates you’ll qualify for.

You can take out a personal loan for a large variety of reasons, such as to pay for a new car, or home improvement projects. And thanks to the lower interest rates, some people even use a personal loan to pay off other high-interest debts to save money on interest.

Secured loan

If you’re looking to borrow a significant amount of money, this is the type of loan you’ll need to consider. With a secured loan, you can borrow from £10,000 upwards – depending on the value of the asset that you’re securing against your loan.

Let us explain that a bit further… because you’re looking to borrow a large sum of money, the lender wants some security that you’re going to pay back the loan – usually in the form of your home, car or another valuable asset. This means that if you fail to make your repayments, the lender can get their money back by taking the asset from you. This is called repossession. 

So, before you go ahead and take out a secured loan, ask yourself if you can afford the repayments for the total length of the term. Otherwise, you could be putting the roof over your head at risk.

Just like a personal loan, you can take out a secured loan for a variety of reasons, like a home extension or debt consolidation. We’ll delve into that a bit deeper in a second.

Debt consolidation loans

Do you have lots of different forms of credit that you’re struggling to keep up with? A debt consolidation loan could be the right option for you.

It allows you to merge all of your payments into one – making it much easier for you to manage as there’s only one monthly payment, one repayment date, one interest rate and one lender, instead of multiple. Plus, a debt consolidation loan could even reduce your monthly amount – making it easier for you to consistently pay back the debt. Just be aware that lowering your monthly payment could mean lengthening your loan term, which could in turn increase the amount of interest you have to repay overall. Crunch the numbers before you commit, and if it’ll work out more expensive overall, make sure that the extra cost is worth it to you.

You can get debt consolidation loans starting from around £1,000, and they can be unsecured or secured, depending how much you need to borrow. If you skipped the section on secured loans, you may want to scroll back as we explain how this type of loan works in more detail!

If debt is something you struggle with, there are many other solutions available which could suit your financial situation more than a debt consolidation loan. For more information on these, check out our guide.

Bad credit loans

You guessed it… this is a loan for people with bad credit. You could have a low credit score if you’ve missed payments, have CCJs or defaults, you are or have been bankrupt, or you’ve never taken out credit before.

Because bad credit loans are designed for people with low credit scores, you might have a better chance of being approved for one of these than for a traditional personal loan. However, because people with bad credit histories are considered riskier people to lend to, the lender protects themselves by increasing the interest rate attached to the loan. The average is 49%. You could even be asked to provide a loan guarantor, which is someone who promises to repay the loan should you be unable to.

Even though the interest rates on these loans are quite high, remember that if you consistently make your repayments on time and in full, you could improve your credit score over time. And a better credit score means a better chance of being approved for loans with lower interest rates in the future.

Watch out, though…

Any type of loan has the potential to become very expensive if the interest rate is high, there are fees involved, or if you choose a long repayment term. Remember, a low interest rate can still mean spending a lot of money over the course of a few years!

And, if you’re not able to repay, then you could be hit with additional interest and late payment charges, regardless of what kind of loan you have. And, when it comes to your credit score, a missed payment will be just as harmful whether you fell behind on a £500 payday loan or a £5,000 personal loan.

OK, how you doing!?

Do you have a better idea of which loan is best for your needs? Great! If you need a little round up, here are some questions to ask yourself:

• How much do you want to borrow? If it’s under £10K, you can get a personal (or unsecured loan). For loans from £10-25K, you can choose between secured and unsecured loans. If over £25K, then you’ll need a secured loan.
• Do you own a property or other valuable asset? If you don’t, you won’t be able to take out a secured loan as the lender needs it as security for larger loans. A personal loan is your only option but you can still borrow up to £25K.
• How good is your credit history? If it’s poor, you might have to apply for credit through a specialist lender as you’ll have a better shot of being approved. Be aware that you will probably receive a higher interest rate if you are approved. If you have a good credit rating, you can apply for high-street products and get the best interest rates available.
• Can you make the repayments? You may need to lengthen the loan term if the repayments are too steep – however, this may mean you have more interest to pay back overall. And remember, with a secured loan, your house could be used as collateral – meaning it could be repossessed if you don’t make the repayments in full and on time. There’s a lot to lose!
• Have you done your own research? We can’t stress this enough... make sure you do your own research, try comparison sites, explore different lenders and check the terms of the loan before you accept anything! Once you agree, you’re responsible for repaying the loan for the entire term – so make sure you know what you’re signing up for.