A loan is a sum of money that you can borrow from a lender, such as a bank. It can help to cover the cost of a large expense, acting as either a one-time amount or an ongoing line of credit. Once you’ve started a loan, you’ll then need to pay it off in instalments, often with interest or a fee added.
In this guide, we’ll be covering absolutely everything you need to know about loans, including:
- The different types of loan you can apply for
- The advantages and disadvantages of each loan type
- Factors you should consider before applying for a loan
Thinking about applying for a consumer loan and need some objective guidance? This guide is for you. However, if you’re interested in taking out a loan for business purposes, see our business loans page instead.
What are the different types of loans?
There are several types of loan, and each one comes with its own risks and benefits. Taking out a loan is a decision that should not be taken lightly, so it’s important to understand what you’re getting into and which loan option might be best for you should you decide to go ahead.
We’ll go into much more detail about each of these loans later on, but here is a brief overview of the main types of loan you might consider applying for:
Personal loans
A personal loan (also known as an ‘unsecured’ loan) allows you to borrow a relatively small amount of money starting from around £1,000 – although options can go as high as £25,000.
Many people use personal loans to spread the cost of large purchases, such as home improvements, holidays, or weddings. This type of loan poses less financial risk for the borrower because you won’t have to use an asset (e.g. your house) as collateral. Note: you will still likely need a high credit score to get a good interest rate.
Secured loans
Secured loans require you to use an asset, such as your house, as collateral, which means you could lose the asset if you fall behind with repayments. This means there is potentially a high financial risk with taking out a secured loan, but it could still be a suitable option if you’re confident that you can keep up with your payment schedule.
Collateral lowers the financial risk for the lender, which means you might be able to get a better interest rate or a larger sum of money – even if you have a bad credit history.
Guarantor loans
A guarantor loan requires a guarantor to co-sign your credit agreement, making them legally obligated to repay the loan on your behalf if you can’t. This is usually an older relative or friend who has a good credit history and can therefore be trusted by the lender.
Guarantor loans carry risk for both the guarantor and the borrower. However, if you have a low credit score, using a guarantor might be your best chance of getting accepted for a loan.
Car finance loans
A car finance loan offers a way for people to buy cars that they can’t afford to pay for upfront. Typically, the borrower will pay a deposit and then pay off the rest (with interest) in monthly instalments over a fixed term.
A longer term means lower monthly repayments, but bear in mind that this could cost you more in the long run as you’ll end up paying more interest overall.
Payday loans
A payday loan is a short-term loan, usually for a relatively small sum of money. They are designed to help people cope with small, unexpected expenses until they next get paid.
These loans can be easy to get, but interest rates can be much higher than your average personal loan. If you do decide to take out a payday loan, it’s important to compare rates across payday lenders before you apply so that you don’t end up paying more interest than you have to.
Debt consolidation loans
A debt consolidation loan allows the borrower to combine all of their existing debts into one. Combining multiple debts can make the debt repayment more manageable, reducing the number of separate payments and interest rates that the borrower has to worry about.
You could save on the total amount you pay out each month by opting for a debt consolidation loan, but it might also be worth doing just to make one payment a month instead of paying various amounts to different lenders.
Student Loans
A student loan is a loan provided by the government to those seeking financial support at university. It is used to cover the cost of tuition fees and living expenses while studying.
The size of your student loan will depend on your household income, country of residence, and whether you’re studying full-time or part-time. Read our full guide to student loans to find out how much student finance you are eligible for and how to apply.
Factors to consider before applying for a loan
Taking out a loan is a big decision that shouldn’t be taken lightly. You’ll probably be paying off the loan over several years, so making sure you’ve asked yourself all of the right questions before applying is really important.
Some of the key things you should think about are:
How much can I afford to borrow?
You need to make sure that you’ll be able to afford the monthly repayments on your loan on time and in full. If you fail to pay on time, you risk damaging your credit score, facing heavy tax penalties, or even losing important assets such as your house (if you’re choosing a secured loan).
Review your monthly income and expenses to work out how much you can afford to pay back each month. You’ll also need to take into account how your financial commitments could change while you’re paying off the loan.
When you apply for a loan, make sure that you know what fees are associated with it. Some lenders will charge you an application fee or processing fee, which could be added to your overall debt. If there are any hidden fees attached to your loan, make sure that they’re clearly listed in the terms and conditions so that you know what they are before agreeing to the contract.
Which type of loan is best for me?
There are several different loan types to choose from, and each comes with its own set of risks and benefits. Make sure you do your research to find out which one is right for you, remembering that interest rates and terms can vary massively between them.
Having a good understanding of how personal loan interest rates work can help you determine how much you will pay each month, and for how long the loan will last. In 2022, the average interest rate for personal loans was around 9.41%. Borrower credit scores and financial histories can affect the lender’s rates on personal loans, with the rates ranging from 6% to 36%.
Will the loan negatively affect my credit score?
When you apply for a loan, your credit score can be temporarily lowered. You should try to space out your loan applications over several months to avoid causing any long-term damage to your credit score.
Might a credit card be better for me?
Loans tend to be more predictable when it comes to repayment schedules, but credit cards can offer more flexibility and offer a range of other benefits, too. You need to consider whether a loan is actually the best option for you – this may depend on your financial situation, or just on your personal preferences.
What is an annual percentage rate (APR)?
Annual percentage rate (APR) indicates the interest rate for a whole year, rather than just the monthly rate. When you apply for a loan, you will receive a personalised APR based on the information the lender has about you.
The APR can help you to understand the cost of borrowing, but be aware that a representative APR only shows you the typical cost of a loan and doesn’t mean you’re guaranteed to receive this rate.
In June 2022, the average annual percentage rate (APR) on a £10,000 personal loan was 4.11%, which is the highest this figure has been since 2016.
How do I apply for a loan?
Once you’ve decided which loan (if any) is right for you, you can usually apply online either via a credit broker or by going directly to the lender’s website. It may also be possible to apply in person at one of the lender’s branches, which may take longer but can be useful if you think you’ll need help filling out the application form.
The credit form will ask you a number of questions. These may vary slightly between lenders depending on their criteria, but will often include things such as:
- Full name
- Date of birth
- Contact details
- Current and previous addresses
- Marital status
- Employment status
- Job title and employer
- Salary and household income
- Other financial commitments (e.g. Do you have a mortgage? Any credit cards?)
- Living costs (for rent, bills, food, travel, etc.)
It’s essential that your information is accurate and up to date when applying for a loan, so make sure you have all the relevant documents to hand.
The information you supply helps the lender to confirm your identity and gain a better understanding of your financial situation so they can decide if lending to you is a good idea.
What happens after I apply for a loan?
The lender will assess your eligibility for a loan using the information available to them, which typically includes:
- Information from your credit report
- Details from your application
- The company’s own lending criteria
- Any data that the company already holds on you (if you’re an existing customer, for example)
Most companies use an automated process to work out your score, so you could get an answer within hours. Your credit score will be a number between 0 and 999 – the higher it is, the more likely you are to be approved for the loan. Some companies offer tools that allow you to get an idea of what your credit score might be before you apply, which can help you decide whether applying will be worth it.
If you’re accepted for the loan, the lender will set out the terms and tell you the interest rate they’re willing to offer. If your loan is refused, that doesn’t mean you can’t apply again with a different lender – each lender has different criteria, so you could be accepted elsewhere. Just remember that if you apply for more than one loan within a short space of time, this could lower your credit score.
How long does it take for a loan to be processed?
The amount of time you’ll have to wait for the loan to go into your account will depend on the type of loan, the type of lender, and whether you’ve been a customer of the lender before.
Some lenders might be able to transfer the money to you on the same day your application is approved, while others could take a week or more.
You may want to ask the lender when you can expect to receive the money for an accurate answer, but typically:
- If your lender is a bank and you’re an existing customer, you may receive the funds on the same day your loan is approved (and within two business days). If you’re a new customer, you might have to wait slightly longer, generally between two to five business days.
- If your lender is an online direct lender, you’ll most likely receive your money on the same day that your loan is approved, or the following business day. This is because online lenders typically sell themselves based on the promise of speedy service (although the interest rates might be high).
- If your lender is a credit union, you could have to wait two weeks for the money to land in your account, but this varies from union to union.
- If your loan is a guarantor loan, you might have to wait slightly longer to receive your funds because the process is more complex as two people are involved (you and your guarantor). In this case, it can take anywhere between one business day to two weeks for the money to be paid into your account.
Can I apply for a loan if I have a bad credit score?
It is possible to get a loan if you have a poor credit history, but bear in mind that you might be offered a lower loan amount and a higher interest rate.
Applying for a loan could also lower your credit score even more, so it’s important to consider whether taking out a loan is really your best option.
How can I improve my chances of getting approved for a loan?
Your credit score isn’t set in stone, it changes based on your financial behaviour. There are many ways you can improve your credit score to increase your chances of getting approved for a loan, including:
- Making regular payments on time
- Monitoring your credit file for fraudulent activity
- Avoiding moving home a lot (if you can)
- Keeping old accounts open and showing a long credit history
Alternatively, if you have little to no credit information (because you’re a young person or new to the country), you might want to focus on building your credit history to improve your chances of getting approved for a loan.
You can build up your credit history by:
- Opening a bank account
- Getting a credit builder card (just make sure you pay it off on time and in full every month)
- Taking out a small form of credit (e.g. a mobile phone contract or store card)
- Getting on the electoral roll
- Managing your household bills well
Personal loans: Everything you need to know
A personal loan allows you to borrow a relatively small amount of money, ranging from about £1,000 to £25,000. This type of loan is sometimes also known as an unsecured loan because the loan isn’t secured against something valuable, such as your house.
Personal loans therefore pose less financial risk for the borrower, but you will probably need a high credit score in order for your application to be successful and to get a good interest rate.
What CAN personal loans be used for?
Typically, you can take out a personal loan for just about anything and don’t have to specify what you intend to use the money for.
Personal loans are commonly used for large, one-off purchases, including:
- Home improvements
- A new car
- Weddings or other special events
- Holidays
Whatever you use your personal loan for, you need to be confident that you can afford to repay it before applying.
What CAN’T personal loans be used for?
Some lenders prohibit the use of personal loans for certain activities, such as:
- Business-related purposes
- Sharedealing
- Gambling
- Buying property (either outright or as a deposit)
Advantages of taking out a personal loan
Personal loans allow you to pay for goods or services upfront and spread the cost over a longer period of time. This can be useful if you need to make a large, one-off purchase that you would struggle to pay for all at once. Because personal loans are typically for a smaller sum of money than some other types of loan, you can apply for the loan and receive the money relatively quickly.
If your credit score is high, you can usually borrow money at a lower rate with a personal loan compared to some other options. Additionally, interest rates and monthly repayments are normally fixed, so the amount you pay back each month won’t change.
Disadvantages of taking out a personal loan
If you have bad credit, you’re much less likely to get accepted for a personal loan. If you are accepted, you might find you’re charged a very high rate of interest compared to other finance options.
Missed or late payments can harm your credit score, even if you had good credit before taking out the loan. It’s therefore important to be confident that you can afford the repayments before committing yourself to any terms.
There is also a limit to how much you can borrow with a personal loan, with most lenders allowing you to borrow no more than £25,000.
How do personal loans work?
During the application process, the lender will ask for a few personal details including your income, employment status, and how much money you want to borrow. They will then review this information and carry out a credit check to decide whether or not they want to lend to you.
If your application is approved, the lender will send you all the necessary information about your loan, including the interest rate, repayment schedule, and any additional fees. It’s important that you read these terms carefully and understand them before agreeing to the loan.
The money will usually arrive in your account relatively quickly with a personal loan – sometimes on the same day that the loan is approved. You will repay the amount you borrowed, plus interest, in monthly instalments over the agreed period of time.
How long does it take to get a personal loan?
Applying for a loan usually only takes a few minutes, especially if you apply online and have all of the required information to hand. However, it could take slightly longer to fill out the application if the lender requires additional information from you.
Online lenders will typically give you a decision about whether you’ve been approved for a loan very quickly, sometimes even straight away. Your funds could be in your account within a couple of hours once you’ve signed the agreement, but in some cases it might take several days for your money to arrive.
How is interest charged on a personal loan?
Interest is calculated as a percentage of the total amount you owe and is usually charged on a monthly basis. This means the longer you have the loan, the more interest you’ll end up paying in total, but paying off your loan over a shorter period of time would mean larger monthly payments.
It’s therefore important to decide how much you can afford to pay each month and how much interest you’re willing to pay overall.
Am I eligible for a personal loan?
While the eligibility criteria will vary slightly from lender to lender, the minimum requirements you must meet to qualify for a personal loan are:
- Aged 18 years or older
- UK resident
- Earn a regular income
If you have a bad credit history, you might still be able to get a personal loan, but your options might be more limited and you might not be able to borrow as much as someone with a better credit score. You will also likely have to pay higher interest rates.
How do I manage my loan repayments?
Carefully managing your loan repayments is essential for preventing your credit score from dropping and ensuring lenders will trust you to borrow again in the future if you need to.
Tips to help you manage your loan effectively:
- Stick to your repayment schedule to avoid penalty fees and bring down your credit score
- Keep a monthly budget so you can be certain you’ve got enough money to make your repayments
- Talk to the lender as soon as possible to discuss your options if you think you might not be able to make a payment
And if you miss a payment?
Missed or late payments might result in you being charged a late repayment fee, and you could be charged more interest. The missed payment may also be recorded on your credit history, which could bring down your score and make it more difficult to get approved for a loan in the future.
Can I pay off my personal loan early?
Some lenders will allow you to make overpayments or even pay off your loan in full before the end of the term, while others may charge an early repayment fee.
If you think you might want to pay off your loan early, check the terms of your agreement before signing to see if early repayment fees will apply.
What are the alternatives to a personal loan?
If you need to borrow money, a personal loan isn’t your only option. Depending on your personal circumstances and what you intend to use the loan for, you may want to consider the following alternatives:
Secured loan
If you’re struggling to get an unsecured loan or you want to borrow a larger amount of money, you could consider a secured loan. These loans use your property as collateral, which means the lender could repossess your home if you fail to make repayments on time and in full.
Guarantor loan
This is a type of personal loan where a friend or family member agrees to act as guarantor and promises to make the repayments on your behalf if you fail to. Having a guarantor might make it easy for you to get accepted for a loan because it reduces the risk to the lender.
Credit card
If you only need to borrow a small sum over a short period of time, a credit card might be a better option than taking out a personal loan. Using a 0% interest credit card means you can borrow money without paying any interest. This is providing you pay off the card in full by the end of the 0% period and don’t break the terms of your credit agreement.
Overdraft
If you have a current account with an arranged overdraft and only need to borrow a small amount, this could be a more suitable alternative to taking out a personal loan. However, make sure you don’t go over your overdraft limit or you could face high interest charges.
Car finance
If you’re planning to take out a personal loan to buy a new car, you could consider taking out car finance instead. This is when the loan is secured against the vehicle and you make payments each month.
Bridge Loan
A bridge loan is a form of short-term finance that allows you to make a large purchase while you’re waiting for personal funds to become available. It is popularly used by homeowners looking to purchase a new property while waiting for their current home to sell.
Director’s Loan
If you’re the director of a limited company, you are legally permitted to borrow money from the company with a director’s loan. These can be used for any unexpected personal expenses, but must be repaid within nine months and one day of the company’s year-end, otherwise you may face heavy tax penalties.
Friends and family
If you only need a relatively small amount of money, it could be worth asking a close friend or family member to lend you the money instead. Be sure to only ask someone you trust though, and put the terms of the loan in writing to minimise the chance of a disagreement happening later on.
Secured loans: Everything you need to know
If you own an asset, such as a house or a car, secured loans are one way that you might be able to borrow money. This type of loan is a common option for people who need a larger loan, a long loan term (over five years, for example), or who are having trouble getting approved for a personal loan.
However, there is a high financial risk with taking out a secured loan, as you could lose your assets if you fail to make your monthly repayments on time and in full.
This type of loan is also sometimes known as a homeowner loan, home loan, or second-charge mortgage.
How do secured loans work?
If you take out a secured loan, you’ll have to make set monthly repayments to pay back what you owe, plus any interest. The interest rate is calculated as a percentage of the amount you owe, and could be fixed or variable depending on the loan you’ve chosen and the company providing the loan.
If you fail to make the monthly repayments on time and in full, the lender has the legal right to take possession of your home. This means they can forcibly sell your home to regain the money you owe them. Your failure to pay will also be recorded on your credit report, which will lower your credit score and make it harder for you to borrow money and access certain services in the future.
What’s the difference between a secured and unsecured loan?
An unsecured loan, also known as a personal loan, isn’t attached to your home or any other asset, unlike a secured loan. Because of this, unsecured loans are typically considered to pose a higher risk for lenders. This means you’ll usually need a good credit score to be approved for an unsecured loan – this is so that the lender has at least some reassurance that you can pay them back.
What are the advantages of taking out a secured loan?
- You may be able to take out larger amounts. Generally, the maximum borrowing amount with a personal loan is £25,000, but secured loans often allow you to borrow up to £100,000 or more. This could be useful if you’re planning a big home renovation project, or if you need to cover expensive education costs.
- It’s usually easier to get approved for a secured loan even if you have poor credit or no credit history. This is because using your asset as collateral lowers the risk for the lender.
- The loan repayment period might be longer, which will make your monthly payments more affordable.
What are the disadvantages of taking out a secured loan?
- Taking out a secured loan comes with significant financial risk. If you fail to pay the money back on time, the lender can possess your home to recover the debt.
- Although secured loans may give you more time to pay back the debt, which could reduce your monthly payments, you’ll likely end up having to pay more interest overall as a result. Interest is charged monthly, so the more months you have the loan for, the more interest you’ll incur.
- If you want to pay off your loan faster than what was agreed with the lender, you might have to pay early repayment fees.
Is it easy to get a secured loan?
It’s usually easier to get a secured loan than most other types of loan because you’re offering your home (or other asset) as a guarantee for payments. This means the lender will see you as less of a financial risk and will rely less on your credit score to make the decision.
A secured loan might therefore be appealing if you’ve been refused for other types of loan and own a home. However, you must be certain that you’ll be able to make the repayments on time, or else you risk losing your collateral.
What should I consider before applying for a secured loan?
Secured loans come with considerable risk to the borrower, so you should think about the following carefully before applying:
Your financial ability
Consider what you can afford to pay each month and whether a secured loan really is the best option for your situation. Since the repayment period can be very long for secured loans, you’ll also want to take into account your future expenses as well, such as starting a family or buying a home.
You need to be confident that you can make all of your monthly repayments on time and in full, even if your financial situation or personal circumstances change.
Interest rates
Most secured loans have a variable interest rate, which means the amount you have to pay back could potentially rise over the course of the repayment period. You’ll need to account for this possibility when working out what you can afford.
You should also bear in mind that the advertised rate isn’t always the rate you’ll get – the rate you’re offered may depend on the amount you want to borrow, the length of the borrowing period, your credit score, and the value of your collateral.
Your loan-to-value ratio
The lender will look at how much equity you have in your property when you apply for a secured loan. This is the difference between how much your home is worth and how much of the mortgage you still have left to pay, which gives the lender an idea of how much money they could recover from selling your home if you can’t keep up with repayments.
Generally, the more equity you have, the more money you’ll be able to borrow.
Can I pay off a secured loan early?
In most cases, you’ll have to pay a fee if you want to pay your secured loan off early. This is usually around the cost of one to three month’s interest, but you can check with your lender to find out the exact amount.
Assuming the loan is secured against your home, you will usually be expected to pay it off if you move house before the end of the repayment period.
How do I find a secured loan?
If you intend to apply for a secured loan, you should shop around to find the best possible deal for you. There are plenty of websites that will allow you to compare loans without affecting your credit score – just search for ‘loan comparison’.
How should I manage my secured loan?
You’ll need to make your repayments on time and in full to avoid losing your home and negatively impacting your credit score. A good place to start could be setting up a direct debit with the lender so that you never forget to make a payment. You might also consider creating a budget or inventorying your monthly outgoings so that you’ll always have enough money to cover your loan repayments.
Guarantor loans: Everything you need to know
Guarantor loans offer people who are struggling to get accepted for a loan an opportunity to borrow with the help of a guarantor. This is usually a family member or friend with a good credit score who ‘guarantees’ to make repayments on your behalf if you can’t.
A guarantor loan might be a good option if you’re a young person or new to the country and don’t have a credit history, or if you have a bad credit record. Although this type of loan comes with risk for both the guarantor and borrower, it also gives the borrower a chance to build a good credit score as long as they keep up with repayments.
How do guarantor loans work?
Despite an extra person (the guarantor) being involved in the process, guarantor loans work in the same way as any other loan – you borrow money from the lender, and then pay it back in monthly instalments over an agreed period of time.
The only difference is that the guarantor is also part of the agreement. If you’re unable to keep up with your repayments, your guarantor will be legally obligated to step in and deliver on your behalf.
It’s worth noting that some lenders might send the loan to the guarantor rather than directly to the borrower, giving the guarantor the option to either send the money to the borrower or return it to the lender within the two-week ‘cooling-off’ period if they are unhappy with the agreement. As long as the guarantor is happy with the agreement, the borrower will receive their loan in full and pay it back as per the terms of the loan.
What are the advantages of a guarantor loan?
If you have a bad credit score and have been rejected by other lenders, a guarantor loan might be your best chance of receiving the money you want.
Taking out a guarantor loan is also an opportunity to improve your credit score, provided you keep up with your repayments to prove you’re a reliable borrower. A better credit score will make applying for any future loans or credit cards easier, and it means you might receive better interest rates.
What are the disadvantages of a guarantor loan?
Guarantor loans can be a lot more expensive than other types of loans, so you’ll need to be confident that you can keep up with the repayments.
For the borrower, a guarantor loan is relatively low risk. The burden falls mostly on your guarantor, who will be obligated by law to make the payments on your behalf if you fail to do so.
Who can be my guarantor?
Your guarantor should be someone you trust and feel comfortable discussing your finances with, which is why they’re most likely to be a family member or close friend. However, almost anyone you know can act as your guarantor, provided they have a good credit history and are over 21 years old. In most cases, they will also need to be homeowners.
As part of the application process, your guarantor will have to undergo a credit check to ensure that they can be relied on to make the loan repayments if you can’t. This will also involve providing bank details, bank statements, and proof of ID.
What should I look for when choosing a guarantor loan?
You should look at things like the APR, how much you’ll have to pay each month, and for how many years you’ll be repaying the loan to make sure you’ll be able to keep up with the repayments. This is especially important when it comes to guarantor loans, as your guarantor will have to make the repayments for you if you can’t.
There are countless guarantor loan options to choose from, so using a comparison website can be useful to compare loans against each other and find the one that would work best for you.
Car finance loans: Everything you need to know
Buying a new car can be a very expensive endeavour, making car finance a popular funding solution. Car finance loans offer a way for people to buy cars who otherwise wouldn’t be able to afford the upfront costs.
How do car finance loans work?
Typically, the borrower will pay a deposit for their new car, then the rest in monthly repayments (with interest) over a fixed term, which could be anywhere between one year and five years.
The amount you have to repay each month will depend on the length of the term you choose, which can vary considerably between lenders. A longer term means you’ll have to pay less each month, but bear in mind that this could eventually end up being more expensive over time because you’d be paying more interest.
What types of car finance loans are there?
There isn’t just one option when it comes to car finance loans so it’s important to understand which one might be most suitable for you based on your individual needs and circumstances.
Hire purchase
This type of car financing allows you to spread monthly payments over a set period of time. Once you’ve made the last repayment, the car is yours to keep. This type of car financing is typically only an option if you purchase your car through a car dealer.
Personal loans
You might choose to take out a personal loan in order to finance your car and can usually borrow up to £25,000. Personal loans usually offer a fixed interest rate and a fixed term, so you should know exactly how much you’ll have to pay back each month.
Personal contract purchase (PCP)
This type of car finance loan is based on the car’s depreciation value rather than its total value. Rather than paying off the full value of the car as you would with a hire purchase agreement, with a PCP agreement, you’ll only pay what your lender predicts the car will lose in value over the course of your agreement. This means your monthly payments should be lower compared to a hire purchase agreement.
PCP deals provide you with multiple options at the end of your agreement – you can either buy the car outright, give the car back and make no further payments, or take out a new agreement.
Personal contract hire (PCH)
PCH loan agreements involve paying a monthly fee to rent a car, then returning it at the end of the agreement period. Unlike a personal contract purchase agreement, there is no option at the end of the agreement period to buy the car outright.
How much does a car finance loan cost?
It’s difficult to say how much taking out a car finance loan will cost because there are so many different factors that will determine this, such as:
- The amount you’re borrowing – The more you borrow, the more you’ll have to pay back
- The interest rate – The higher the interest rate, the more you’ll have to pay back
- The loan term – If you’re borrowing over a longer period, you’ll end up paying more interest over the full term
- Your credit score and history – If you have a bad credit score, you’ll probably be charged a much higher interest rate
- Loan fees – There can be hidden fees when applying for a loan such as admin or arrangement fees, which can make a big difference to the amount you’ll have to pay when tallied up
For a more accurate estimation of how much a car finance loan might cost, you can compare loans using either a comparison website or by visiting the websites of specific car finance companies directly. This will not affect your credit score.
Can I get a car finance loan if I have bad credit?
It might be more difficult to get approved for a car finance loan if you have bad credit, but with plenty of car financing options available, you should be able to find one that will be a good fit for your financial situation. Just bear in mind that you might be offered a higher interest rate if your credit score is poor.
Taking out car finance and meeting all of your payment obligations could actually help to improve your credit report because you’ll have demonstrated that you’re capable of being responsible with your money.
Shop around and take advantage of the many loan comparison tools that are available to you for free online. Some car finance lenders may still accept you even if your credit report is poor – however, you may be subject to higher interest rates.
What do I need to apply for car finance?
The documents required to apply for car finance can vary from lender to lender, but there are some that most companies will want to see.
The main documents you’ll need:
- Proof of address
- A scan of your driving licence or passport
- Contact details
- Payslips or other proof of your annual income to show that you can afford the payments
Can I get a car finance loan for a used car?
You should be able to get a car finance loan for a used car in the same way that you would for a new one – although whether your loan is approved, the amount you’ll receive, and the amount of interest you’ll have to pay back will depend on your own personal circumstances.
You can search and compare car finance loan options for a used car in the same way you would if you were buying a new car.
What happens if I fall behind with repayments?
With hire purchase and personal contract purchase (PCP), the finance company could take the car back and use the proceeds to repay your debt if you fail to make your payments on time and in full.
If you have a personal loan or bought the car using a credit card, the lender will expect you to repay whatever you still owe, but you won’t be under any obligation to sell your car.
As for personal contract hire, if you can’t keep up with your repayments then you may be forced to pay penalty fees and could have the car taken away from you.
Can I repay my car finance loan early?
Whether or not you can pay off your car finance loan early depends on the specific terms of your loan agreement. In most cases, you will probably have to pay early repayment fees if you want to pay off your loan in full before the end of the repayment period.
If you can afford to make overpayments each month or pay off the full amount early, this could be a good option as you’ll have to pay less interest overall. Just make sure that it would make sense for you financially once you’ve taken the cost of early repayment fees into account.
Can I sell a car that’s on finance?
It’s illegal to knowingly sell a car with outstanding finance still on it because the car isn’t yours to sell. You can only sell the car once your loan is paid off in full and if the car officially belongs to you and not the lender.
What are the alternatives to car finance?
If you don’t think a dedicated car finance plan is right for you, there are other options available that you might want to consider.
If you need to borrow a larger amount, perhaps because you want to purchase a high-end model or because you’ve had trouble getting accepted for a personal loan in the past, then a secured loan could boost your chances of getting the money you need.
Think very carefully about whether this is the right decision for you though because secured loans require you to offer an asset, such as your home, as collateral. If you fail to keep up with your monthly loan repayments, the lender has the right to sell your home to regain the money.
However, because of the associated risk, secured loans tend to offer higher borrowing amounts, lower interest rates, and longer loan terms, which could help make your monthly repayments more manageable.
Because you won’t have to pay any interest, a 0% purchase credit card could be an attractive alternative to car finance, but only if you can pay it off quickly in order to keep the 0% rate. You’ll also need to watch out for any agreed limits to your card. If you break these, you will probably lose your 0% rate and could suddenly end up being charged a significant amount in interest.
Payday Loans: Everything you need to know
Essentially, payday loans are short-term loans that are designed to help people deal with unexpected expenses. These tend to be on the smaller side, typically ranging from £50 to £1,000 – but their interest rates tend to be much higher than other forms of credit, which is where many people can get caught out.
For payday loans, it’s not uncommon for them to come with a large APR of 1,500%.
As a payday loan dispenses a portion of the total amount ahead of your salary, you’ll usually be expected to pay it off the next time your pay cheque comes through. This is usually handled by direct debit, so it’s crucial to make sure that there’s enough in your bank to pay it off.
These penalty charges often land unexpecting people in even more financial hot water, which can lead to an ongoing cycle of debt.
Who can get a payday loan?
Anyone over 18 can apply for a payday loan. However, as approval hinges on various factors, you could be rejected. These include:
- Your credit score and history
- Further financial information
- The payday loan company’s own criteria – which can vary
Essentially, the lower your credit score, the less likely you are to be approved for a payday loan. There are some alternative payday lenders that ‘specialise’ in bad credit loans – which we’ll touch on later – who will accept you even if your credit is in bad shape.
However, they are at liberty to charge much higher interest rates in order to take on the ‘risk’.
What should I do before getting a payday loan?
Before getting a payday loan, make sure you do your research thoroughly and make sure that the lender thoroughly checks that you are in good standing to pay the loan back.
When you approach someone for a payday loan, the first thing the lender should do is ascertain whether you’ve got enough money coming in each month to pay the loan back.
Your lender should run through the following steps
Before dispensing any credit, your funder should explain the main features of the loan, including:
- How much you’ll be expected to pay back
- What happens if you do not pay the loan back
- How much you’ll be charged for late repayments
- The expectations of the loan’s usage – e.g, it should not be used for long-term borrowing
The lender should also explain how continuous payment authorities (CPAs) work and how they can be cancelled.
As such, this aspect of lending is highly regulated. That means all advertisements for it, including SMS and email messaging, is strictly monitored and must include the warning:
Other measures have been introduced to help mediate the effects of these loans. That includes an interest cap, first introduced from the 2nd January 2015 on payday loans of 0.8% per day – with no borrower having to pay back more than twice what they have borrowed.
You must also make sure to explore the market for the best deal. That’s because online payday lenders must publish their deals on at least one price comparison website, so you can get the best fit for your needs.
However, the price comparison site must be regulated by the Financial Conduct Authority to make sure you’re in safe hands.
You can check in the Financial Services Register if a price comparison website is regulated – just make sure you use the company’s name rather than the website name. This can often be found on the homepage or in the footer.
Will applying for a payday loan affect my credit score?
This is one of the most common questions asked when we talk about payday loans.
The answer to this depends on whether you’ll be able to repay your loan in full and on time. If that’s the case – great! Your credit score is absolutely fine.
However, there may be exceptions to this rule. Some companies think payday loans as a negative way to gain cash – with preconceptions that payday loan borrowers are less reliable – which might make any trace of an application work against your favour.
It’s also important to remember that any loan application can impact your credit score (temporarily) thanks to the new credit account being added to your profile as part of a hard credit search.
Considering your credit score
It’s important to keep in mind that you have many credit scores.
Your personal score will be determined by credit reference agencies, lenders, and other businesses based on their own procedures and standards. So, a payday loan may have a varying impact on your credit score depending on the organisation.
In fact, some lenders don’t even distinguish between payday loans and other loans because they are aware that many borrowers of short-term loans aren’t always in desperate financial situations.
So, always make sure to check whether your credit score is in good enough shape before making any financial decisions – as not all impacts are temporary!
What are the risks of getting a payday loan?
One of the biggest concerns with a payday loan is getting caught in a cycle of debt. This looks a bit like someone borrowing money when they simply don’t have enough money – and then running out of money again because of the loan’s high interest rate.
This can send people on a spiral of taking out loan after loan to pay back each lender… which is something that is very difficult to resolve and can have major financial and mental repercussions.
Keep in mind that you may also incur costs from payday loans if you don’t pay them back on time – not just as a whole.
The Financial Conduct Authority has set a limit on these costs at £15 plus interest on the amount you borrowed, because payday loans have such high interest rates (that even with these restrictions) – not being able to pay them back can be incredibly costly.
You should also note that interest on payday loans is often assessed daily and is calculated as a percentage of the amount you borrow, so they are subject to change when you apply.
When is getting a payday loan a bad idea?
Although a payday loan can seem like a handy way to get some extra cash when you’re in a tight squeeze, it’s something that shouldn’t be underestimated.
The two situations where payday loans are a bad idea are:
- If you’re already in debt or are struggling to pay someone back
- If you’re not 100% certain you’ll be able to pay the loan back (including interest)
This is down to the risk and the high rates of interest that payday lenders use to make money on your loan – even if you’re borrowing only a small amount.
In these cases, it might be better to look for an alternative form of credit to help you in the meantime.
If you still believe a payday loan is the best option for you, then make sure to carefully review the terms and conditions, keep to your spending plan, and make sure you’ll have enough money in your account to make the required repayments on time.
Can I change my mind after I’ve received my payday loan?
If you withdraw from your agreement within the ‘cooling off period’, then you can avoid any further charges. These periods usually last within 14 days from when you receive your loan, which means you’ll have to return the full amount you borrowed – plus interest.
If you’re charged further, these will be refunded to your account.
Can I consolidate my payday loan?
As we’ll touch on further in this guide, some people would prefer to ‘consolidate’ their payday loans.
By ‘grouping’ loans together, this means that repayments can be simplified and the overall amount of interest is reduced, through moving debt from multiple accounts to just one account. This one will usually have a lower interest rate.
This solution isn’t suitable for everyone though – and remember that applying for another account can lower your credit score.
How can I avoid payday loans
While we can’t plan for unexpected expenses, one of the best ways of avoiding a payday loan is to try and accumulate some savings each month and budget as best you can.
But if you still find yourself counting pennies and still coming up short, there are some other alternatives:
- Asking to borrow from friends or family
- Cutting back on other expenses and costs that aren’t needed
- Selling your own belongings
- Notifying your existing lenders if you think you can’t repay them on time
There are also other ways to borrow money in the short-term that might work better than a payday loan.
Other ways to borrow short-term
Payday loans are an expensive way to help people hurdle a small, unexpected cost. However, they aren’t suitable for longer-term difficulties – so considering another form of finance is a good idea.
Other lines of credit
A credit card or personal loan may be another option with a low limit. Another solution is to seek a loan from a credit union, which is more affordable than a payday offering. Here you can check to see if there’s a credit union in your area.
Seeking an overdraft
Banks may allow you to open an overdraft account if you have one.
However, overdrawing without permission can result in hefty fees, so be careful.
Asking a local authority
A local authority may be able to help you if you’re on a low income and need money in an emergency. Citizens Advice offers plenty of advice when it comes to funding available to those struggling with debt or unexpected issues through the Cost of Living Crisis, who may be able to point you in the right direction.
Debt consolidation loans: Everything you need to know
In a nutshell, debt consolidation is pretty much what it says on the tin. It’s the process of ‘consolidating’ – or combining – multiple debts, including loans, credit cards and overdrafts, into one lump sum of a loan.
This can help simplify repayments and reduce stress, especially for those who have taken multiple loans out and are struggling to repay them.
These can include:
- credit cards
- store cards
- overdrafts
- personal loans
Obviously, if you are spinning multiple plates when it comes to debt, it can be hard to prioritise repayments – especially when different loans have varying repayment dates and interest rates.
The solution that a debt consolidation loan provides is the ability to merge these debts together into a single loan to lower your overall monthly payments. As such, it offers you a single interest rate and one recurring repayment – as well as a clear loan term with a set repayment schedule.
What can debt consolidation loans be used for?
Merging your multiple credit commitments into one loan can help you pay off your debt more quickly if you’re struggling to keep up with repayments.
This kind of loan can be used to pay off all your outstanding debts and credit commitments, so you’re owing money to a single lender.
The two types of debt consolidation loan
Secured
This is where the amount you’re set to borrow is ‘secured’ against an asset, such as property. This asset (usually your home) is used as collateral if you miss payments or are unable to pay back the loan, which means you could lose it.
As such, you may be offered a secured loan if you owe a good deal of money or if you have a poor credit history. This is to show lenders that you have a guarantee in place for them if you are unable to repay your debt.
It’s sometimes called homeowner loans when you consolidate debt with your home as collateral.
Unsecured
This is where the loan isn’t secured against your home or other assets. However, as there isn’t any collateral offered as part of the structured deal, you may only be able to access a limited amount of funds when compared to a secured loan.
Before taking out a consolidated loan of any kind, It’s important to get debt advice before you make your final decision.
As with any financial product, they might not suit everyone’s needs and might cause more issues for you in the long-term.
How do debt consolidation loans work?
If you’re considering a debt consolidation loan, it’s important to research and compare the market to find the best lender for you.
Look at what you owe
Examine your existing debts, whether they come from a loan, overdraft or credit card. Then you’ll need to work out the total value of the loan you’ll need to cover those amounts, before applying for a consolidation facility.
Pay off your debts with the consolidation loan
You’ll then use the loan to pay off any existing debts and lines of credit. As you’ll now only have one loan, your monthly repayments are reduced because you only have to make one payment.
Pay back the loan
Once you’ve paid off the ‘multiple’ debts, you’ll then be expected to pay back the consolidation loan within the set term – plus any interest.
Having just one monthly repayment could make things easier to manage, but it’s important to remember that running behind on your repayments could lead to financial hardship, such as your assets being seized depending on the loan agreement.
When does consolidating debts make sense?
There are numerous benefits to taking out a consolidation loan. In comparison to having to deal with multiple, ongoing repayments from different debts, your savings aren’t subject to depletion thanks to charges or incurred fees.
You can also use one pot to cut your spending and get back on track, especially since there is only one repayment to focus on. You could also end up paying less interest than before, making the total repayable amount less than your previous position.
However, it could tot up to more if you choose to repay the loan over a longer period of time.
Things to keep in mind
Before you choose a debt consolidation loan, consider the things that might happen in the future that might get in the way of you repaying your debts.
A few scenarios might be:
- What if you lose your job?
- What if you fall ill?
- What if interest rates go up?
Also, if you’re finding yourself turning to credit on a regular basis – whether that’s to pay for basic household bills or get from month to month, that could be a sign of a much bigger problem that a debt consolidation loan may not fix.
That’s why it’s so important to seek independent advice before committing to a debt consolidation loan.
The risks of debt consolidation loans
As with any financial product, debt consolidation loans come with an equal amount of risk to their benefits. In this section, we’ll touch on the main factors that could impact you should you choose to take out a debt consolidation.
You might end up paying more
At first glance, a debt consolidation loan can reduce the overall effort of juggling multiple debts and the amount of stress that comes with it. However, merging reduces the amount of stress and effort of managing multiple debts, it’s important to check how it will impact your total repayment amount.
Even if the interest rate on a new loan is lower than any of the current debts you are paying, you might end up paying more on a consolidated loan if it has a longer term.
This is because the amount you are set to borrow, interest rate and loan term all determine how much interest you’ll be expected to pay. As a result, make sure to check the ‘total amount payable’ when comparing your two options to see if you are actually making a better decision.
Early repayment fees on current loans
When consolidating multiple debts, the total amount of money that is owed across the board will be paid. However, you should make sure to check whether you’d be subject to an ‘early repayment fee’ according to the T’s and C’s on your existing facilities.
If so, you could be faced with a costly charge that should be factored into your overall calculations.
Affording the new debt and payments
To stop going into more debt and making your financial situation even more difficult, it’s crucial that you meet the loan payments. Anticipating the possibility of your situation changing further and creating a budget can help you understand how much money is available to pay the loan, as well as balancing your day-to-day expenses.
Will a debt consolidation loan affect your credit score?
As with most financial products, your lender will carry out a hard credit check.
This leaves a notification on your credit report, which can negatively affect your overall credit score.
However, as you start to pay off debt, your credit score may likely increase – as long as you avoid taking on more debt and make your repayments on time.
What are the alternatives to debt consolidation loans?
If you’re worried about the impacts of a debt consolidation loan, or if your credit score isn’t high enough to qualify you for this particular solution, there are some alternatives.
From refinancing options and credit cards to debt settlement, make sure you fully understand your options before making a financial commitment.
Balance Transfer Credit Card
A balance transfer card can help you pay off debt with a promotional low interest rate of 0% – often lasting between 12 and 21 months.
This means that high-interest debt can be easily transferred to the card and paid off within the introductory period, essentially offsetting the interest.
However, it’s important to note that good credit really comes into play here, as the longest longest 0% APR periods are usually only offered to people with excellent credit scores.
You will also be expected to pay a balance transfer fee – often 3% or 5% of the amount transferred – which will be credited to your new card. Another thing to note is that if you don’t pay off the balance within the promotional period, you may end up just paying the regular interest on any balance – so make sure you have the funds available to pay it off within scope.
Cash-Out Refinance
Cash-out refinancing can replace your current mortgage with a larger loan that allows you to, as the name suggests, cash-out the difference between the amount you borrowed and how much you still owe.
The maximum does vary across the industry, but many lenders let you borrow up to 80% of your home’s value.
Much like a secured loan, you’ll be placing your home as a collateral asset on the capital, so if you struggle to keep up with your new mortgage payments – you can lose it.
It’s also important to note that a cash-out loan still comes with extra costs, including a payment of between 2% and 6% of the amount borrowed in closing costs. However, you can still save money on interest charges when compared to a consolidation loan, while potentially getting a better interest rate on your new mortgage.
Debt Settlement
If you have no other option besides bankruptcy but want an alternative to a consolidatory debt, a debt settlement can help.
This means actively negotiating with lenders to hopefully come to an agreement that you can pay less than what is owed, with debt settlement companies who can do this on your behalf for a fee.
However, it’s crucial to be cautious, as enlisting the help of a debt relief company can damage your credit and be equally risky.
Consider these options first:
- Work with a nonprofit credit counsellor
- Get on a debt management plan
- Negotiate directly with the creditor yourself
Bankruptcy
Although it’s considered a last resort, bankruptcy is the legal process that can reduce or ‘write off’ a number of the debts you are unable to pay or can provide a plan to help you repay.
Although it provides breathing room, it can have a long-term impact on your credit, with a mark that stays on the report for seven to ten years. This makes it difficult for you to open new lines of credit, and if you are extended credit, you might have to offset this with higher rates and trickier terms.
That’s why it’s crucial to start efforts to rebuild your credit by paying your bills on time and not taking out any further facilities during this period.
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