What type of loan is best for me?
When it comes to borrowing it’s not just the amount you need and the interest rate to consider, it’s also the type of loan that’s important
What to consider before getting a loan?
There are a number of questions to ask yourself before you apply for a loan. For example:
Do I need the money? Loans can be useful but they charge interest, so you’ll end up paying more back in total than you borrow. Before you apply for a loan, decide whether you need it or whether you’d be better saving up.
How much do I need? The more you borrow, the more you will pay in interest, so consider the size of the loan you’ll need before applying.
Is my credit rating as good as it can be? Lenders will check your credit score before approving a loan and use it to help decide what interest rate to offer. While improving your credit score can take time there might also be some quick steps you can take to boost your score.
What type of loan would suit me best? It’s not just a case of how much you want to borrow, but the type of loan to choose. Will it be secured or unsecured? Will you need a guarantor? Or do you have bad credit and need to use a specialist lender?
Getting the best deal for you. Getting a low interest rate is not the only consideration. Will the monthly costs be affordable? It may be better to take a longer loan, for example, so you’ll pay less per month – even if this means you’ll pay more interest in total. Look at the fees and charges. These might be applied when you take out the loan, for example, or if you miss any payments, or if you want to pay off your loan early.
Shop around. Compare loans with MoneySuperMarket to see deals that are tailored to you and that you’re likely to be approved for. Searching in this way with us won’t have any impact on your credit score.
What are the different types of loans?
There are a range of different types of loans available:
Unsecured personal loan
What is it? A personal loan where you are responsible for the monthly repayments until the debt is cleared. You don’t need to put up a valuable asset, such as your house, to get the loan.
How do repayments work? You pay a fixed amount every month for an agreed term from the start of the loan. Once you have made the final payment, the loan is cleared. If you miss a repayment you’re likely to face additional charges.
Main advantage: There is plenty of choice when it comes to personal unsecured loans in a competitive market meaning you should be able to find a deal to suit your needs.
Potential disadvantage: Interest rates might be higher than on a secured loan and you might not be able to borrow as much. If you can’t make repayments you risk legal action and damaging your credit score, making borrowing harder in the future.
Who is it best suited for? Borrowers who have excellent credit scores will get the best personal loan rates. You may still be able to get an unsecured loan if you have a less than perfect credit score, but it is likely to cost more in interest.
What is it? A loan where you must put down security, usually your house, in case you cannot make repayments.
How do repayments work? You agree to pay a fixed amount every month for a set term from the start of the loan. Once you have made the final payment, the loan is cleared.
Main advantage: By putting up a valuable asset such as your home, a secured loan can allow you to get lower interest rates and a better deal than you might with an unsecured loan. Depending on the value of your property it may also mean you can borrow more than you might with an unsecured loan.
Potential disadvantage: If your circumstances change and you cannot keep up with repayments, you risk losing your home.
Who is it best suited for? A borrower who is looking for a low rate loan and is confident they’ll be able to keep up with repayments throughout the term. They should consider worst-case scenarios, such as what would happen if they lost their job, before making an application.
What is it? A loan specifically taken out to pay for the purchase, lease or long term rental of a car or another vehicle. A car loan could be a personal unsecured loan where you borrow a lump sum and pay it back over time. Alternatively, the loan could be a car financing deal such as personal contract purchase, hire purchase or car leasing.
Main advantage: Car financing typically allows individuals to drive a new vehicle they couldn’t afford if they had to purchase it outright. Depending on the type of car finance, there can be a range of choice, such as owning the car outright at the end of the term, having the option to purchase it, or handing back the keys and taking out another lease.
Potential disadvantage: Car loans and car financing can be expensive if you choose the wrong deal for you. For example, you might face high monthly costs with nothing to show for it at the end of the term. There might also be conditions such as mileage limits, which can add to the cost if you exceed the maximum allowable mileage.
Who is it best suited for? Someone who needs a reliable car – often for work purposes – who can’t and doesn’t have the money or doesn’t want to pay the entire amount upfront.
What is it? A long term loan to help pay for your further and higher education and other expenses while studying. A student loan may be made up of a tuition fee loan – usually up to £9,250 a year in the UK – and a maintenance loan to cover your living costs. The amounts can differ depending on where you live and the type of course you are studying.
How do repayments work? You automatically start repaying the loan when you finish studying and start earning over a certain threshold. You’ll then pay back a proportion of your salary every month, provided your salary remains above the threshold. Interest is also charged on your loan, and this will also vary depending on your annual salary.
Main advantage: A student loan allows you to study and gain qualifications with no upfront cost – and almost every UK student will qualify for a student loan.
Potential disadvantage: While it might help with education, a student loan can leave you with thousands of pounds of debt to pay off through your income for years to come. This can be enough to put some students off studying.
Who is it best suited for? A student loan is best suited for someone who is dedicated to their studies as a path to help with their chosen career.
Debt Consolidation Loans
What is it? A debt consolidation loan is taken out in order to pay off other more expensive debt elsewhere such as high interest credit cards or payday loans.
How do repayments work? As with other types of borrowing, you usually pay one fixed monthly payment to cover the capital and interest on the consolidation loan until the end of the term.
Main advantage: Allows you to pay off higher interest loans elsewhere, making monthly repayments more manageable and potentially clearing the debt faster. Can also simplify your finances by only having one direct debit leave your account every month.
Potential disadvantage: If the debt consolidation loan is taken out over a longer period, monthly repayments might be more manageable, but you could end up paying more overall.
Who is it best suited for? Someone who has different debts at high interest rates and wants to consolidate what they owe into one manageable monthly repayment, ideally at a much lower rate of interest.
Loans for bad credit
How do repayments work? You pay a fixed amount every month for an agreed term from the start of the loan. Once you have made the final payment, the loan is cleared.
Main advantage: Allows access to credit that would otherwise be denied. If you keep up with repayments, a bad credit loan can also show you can borrow responsibly and help build your credit score.
Potential disadvantage: Bad credit loans can be expensive with high interest rates and higher charges for late and missed repayments. Choice may also be more limited than with standard personal loans.
Who is it best suited for? Someone who has bad credit but needs to borrow for an emergency, such as a boiler breakdown in the home or essential car repairs.
What is it? A guarantor loan is a way of borrowing with the support of a guarantor, often a friend or family member, who agrees to take on the debt if you can’t keep up with repayments.
How do repayments work? The fixed monthly repayments will be paid by the principal borrower until the end of the term. Should the borrower not be able to make these repayments, the lender can legally ask the guarantor to meet the shortfall.
Main advantage: It allows someone with a bad credit rating or no credit rating to borrow where otherwise they might not have been able to. As long as repayments are made on time, the guarantor won’t have to be involved.
Potential disadvantage: Guarantor loans can have higher interest rates than other personal loans. Friendships and relationships could also be damaged if something goes wrong and the guarantor has to cover repayments.
Who is it best suited for? Someone who won’t be accepted to borrow on their own and has a strong relationship with the guarantor that won’t be negatively affected should they run into financial trouble and are struggling to make repayments.
What is it? A short-term loan to bridge a gap in funding, typically until a house sale goes through. Bridging loans are often used in connection with house moves, allowing a new purchase to proceed while the sale of an existing property completes.
How do repayments work? Bridging loans are short-term loans that are usually paid back within a few months – or as soon as a house purchase completes. They can be structured in a number of ways but usually involve one lump sum payment at the end to clear the loan.
Main advantage: Can help facilitate the sale and purchase of homes where the completion dates do not align and the property chain would otherwise get stuck.
Potential disadvantage: Bridging loans can be expensive because they involve borrowing large sums at high interest rates.
Who is it best suited for? A homebuyer or developer who needs to push through the purchase of their property, which could otherwise stall. They should also be confident that they will soon be in receipt of funds to pay off the bridging loan.
Compare Loans with MoneySuperMarket
Whatever type of loan you’re looking for, it’s quick and easy to compare loans with MoneySuperMarket.
Simply tell us a few details about your finances and the type of loan you’re looking for and we’ll search our panel of leading providers to find the most suitable deal for you.
Our ‘soft search’ will show you your chances of being accepted for each loan without it affecting your credit rating.
You can compare the key information such as interest rates and monthly repayment amounts before making your choice, clicking through to the lender and completing your application.
MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.