What type of loan do I need?
This is probably the first question you need to ask yourself. There are many different types of loan on the market:
These loans do not require you to put forward security, such as your property, in order to secure the loan. Unsecured loan providers typically offer lower loan amounts (usually up to around £30,000) over shorter periods, ranging from a few weeks to a few years. Interest rates are also often higher and other charges and fees may apply. Types of unsecured loan include:
- Personal bank loans
- Personal loans from alternative and online lenders
- Short-term loans
- Payday loans
- Business loans
- Peer-to-peer loans
- Bad credit loans
- Guarantor loans
Secured loans are those that are secured against a major asset – usually your home. These loans are often used by those who require a larger loan amount (from around £10,000 to hundreds of thousands) and to repay it over a longer term – usually a number of years. Interest rates can be lower than for an unsecured loan, but you risk losing your home if you can’t keep up with the repayments. Types of secured loans include:
- Secured homeowner loans (second charge mortgages)
- First charge mortgages
- Vehicle finance
- Bridging loans
When comparing loans, establishing whether a secured or unsecured loan is the right choice for you is the first decision to make. To establish what might work best for your situation, consider how much you need to borrow and for how long. If you want to borrow larger amounts over a long period of time, then a secured loan might be your only option, but remember that your home is at risk if you default. If you need to borrow a smaller amount and are able to repay over a number of months, for example, then an unsecured loan might work best for you.
How do I compare loan deals?
Once you have decided the type of loan you want to apply for, it’s sensible to compare the lenders on the market and the deals they are offering. Remember, the deal a lender offers you will depend on various factors, including your credit score, your financial situation, your employment status and your income. Here are the basic areas to compare:
How much can I borrow?
Take a look at the minimum and maximum loan amounts the lender offers and check that this fits your requirements.
How long can I borrow for?
Find out what the lender’s minimum and maximum terms over which they expect borrowers to repay loans and check this is right for you.
What is the cost of borrowing?
The best way to compare lenders is to compare the cost of borrowing. You can do this by looking at the annual percentage rate (APR) charged on the loan, as well as the other fees applicable. The APR is the annual cost of the loan to the borrower for the entire loan term and includes the interest charged and other fees involved. Most lenders will advertise their APR as ‘representative’, which means the advertised APR only needs to be offered to 51 percent of borrowers. As a result, you may be offered a higher APR so take care when applying and receiving your loan offer, to ensure the APR you are actually offered is acceptable to you. To make extra sure you are happy with the cost of borrowing, you can also seek out the TAR (total amount repayable), which should show you the total amount you will end up paying over the term of the loan, including the loan amount, charges and interest.
Are there any other charges applicable?
When comparing loans, as well as the APR, it makes sense to establish if you could incur other charges. These could include:
- Early repayment fees
- Arrangement charges
- Late payment penalties
What are the lending criteria?
As well as finding a low-cost loan that suits your requirements, you’ll need to ensure that you qualify for your chosen loan. Lenders may check any or all of the following before offering you a loan deal:
- Your credit score
- Your employment status
- Your salary
- Your financial commitments
- Your age
- Whether you have a UK address and bank account
- Whether you are a homeowner
There are businesses that will offer you the chance to check your credit score before you start applying for loans, which will help you avoid applying and being turned down. If this should happen, your credit score can be negatively affected.
I know I have bad credit, will I be able to access a loan?
Some lenders of both secured and unsecured loans will consider lending to people with different credit histories. However, you may find that interest rates and charges on these loans are very high, which can make the cost of borrowing unaffordable and can even lead to further financial problems. For those who want to avoid the cost and financial commitment of taking out a loan, there are alternatives that could be cheaper, including arranged bank account overdrafts, zero or low-interest credit cards, credit unions, saving or borrowing from friends or family. Although comparing loans isn’t always a straightforward process, it’s worth putting in a little effort to shop around for the best deal to suit you. The lending market has opened up hugely since the financial crisis and borrowers have so many more options now. Luckily, it’s also never been easier to compare loan providers using online tools, which can help consumers take charge of their financial decisions. So, before taking out a loan, do your homework! Your wallet will thank you.
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