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Types of loans

What type of loan is best for me?

Victoria Russell
Written by  Victoria Russell
5 min read
Updated: 11 Apr 2024

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

Loans can be a powerful financial tool, whether you're looking to achieve a lifelong dream or simply manage a temporary gap in your budget. However, with the potential benefits come significant risks and responsibilities. Borrowing money is a serious commitment, and understanding the ins and outs of the loan process is crucial to ensure you're making a decision that supports your financial well-being.

The importance of understanding the Annual Percentage Rate (APR) cannot be overstated. APR represents the yearly cost of borrowing money, encompassing not only the interest rate but also any additional fees associated with the loan. A lower APR translates to less cost over time, making it essential to compare rates from various lenders to ensure you're getting the best deal possible.

The Importance of APR

Before you sign on the dotted line, it's vital to consider whether taking out a loan is truly necessary. Remember, loans aren't free money; they accrue interest, meaning you'll end up paying back more than you originally borrowed. It's a balancing act between satisfying immediate needs or desires and maintaining long-term financial health.

Assessing the Need for a Loan

Determining the right loan amount is just as crucial as deciding to take out a loan in the first place. Borrow too little, and you may not meet your financial goals; borrow too much, and you could find yourself struggling under a mountain of debt. The key is to borrow what you need for your specific purpose and ensure that you can repay the amount without undue financial strain.

Determining the Loan Amount

Your credit score plays a significant role in the loan application process. Lenders use this score to determine the interest rates you'll be offered. While improving your credit score can be a long-term endeavour, there are sometimes quick fixes that can give it a little boost before applying for a loan.

Credit Rating Considerations

When choosing a loan, you'll encounter various options, including secured or unsecured loans, guarantor loans, and loans designed for those with bad credit. Each type comes with its own set of terms and conditions, and it's important to select one that aligns with your financial circumstances and goals.

Choosing the Right Type of Loan

Securing a low interest rate is important, but you must also consider your ability to manage the monthly payments. Opting for a longer loan term can reduce your monthly outlay but will likely increase the total amount of interest paid over the life of the loan. Additionally, be mindful of fees and charges, such as those for early repayment, which can affect the overall cost of your loan.

What are the Different Types of Loans

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 secured loan is 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.  

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.  

What is it? A bad credit loan is designed for people who have a low credit rating and who are struggling to borrow elsewhere in the mainstream loans market.  

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. 

What is it? A loan when lenders borrow to businesses instead of an individual.  

How do repayments work? These loans are paid back in regular loans the way a standard loan is until the debt is repaid. Because the lender is loaning to a company instead of person, these loans can be much larger amount than other loans. 

Main advantage: Running a company can be expensive especially when you’re starting out. Business loans help with cash flow and to fund and grow your business.  

Potential disadvantage:  The eligibility requirements for business loans are much stricter than they are for standard loans. The lender isn’t just evaluating your credit rating when you apply for a business loan but also your company’s credit score and financial outlook. 

Who is best suited for? As the name suggests, this loan type of loan is for businesses and is made specifically for companies. 

What is it? A type of secured loan which lets homeowners borrow against the equity in their properties. Your loan amount will be based on the difference between your house’s present market value and your mortgage balance due. Click here for more information.

How do repayments work? These tend to be fixed-rate loans and repaid on a monthly basis. 

Main advantage: This loan allows people to get money without having to sell their house. 

Potential disadvantage: The main con of a home equity loan is that you risk losing your house if you can’t keep up with payments. 

Who is best suited for? Homeowners who are confident they can keep up with the loan repayments. 

What is it? A payday loan, is a short-term loan that allows you to borrow money with the intention to tide you over until your next payday.  

How do repayments work? The lender will put the money in your current account. You’ll usually have up to 31 days to pay back the loan, as this isn’t borrowing intended for the long-term. 

Main advantage: These loans tend to be approved immediately and having lower eligibility requirements making them easier to get approved of and to get your hands on the cash. 

Potential disadvantage: Payday loans can be an extremely expensive way to borrow, hence why we don’t compare them at MoneySuperMarket. These loans come with sky-high APRs of up to 1,250% and incur late fees immediately.  

Who is best suited for? People who are sure they’ll be able to pay back the loan and this is their last resort. 

What is it? Sometimes called P2P, these loans work by pairing borrowers with lenders through P2P lending platforms. P2P websites work like a marketplace and are an alternative to borrowing from banks and building societies.  

How do repayments work? You and your lender will agree on a loan repayment plan. 

Main advantage: These loans can have quicker approval times when compared with borrowing from a bank. 

Potential disadvantage: Not all P2P platforms are covered by the Financial Conduct Authority, meaning that when you borrow this way you won’t be protected the way you would when you borrow money in other ways. 

Who is best suited for? For people who don’t want to borrow money from the bank or other traditional finance institutions.

Getting the Best Loan Deal

Comparing loans has never been easier, thanks to online services. Platforms like MoneySuperMarket enable you to sift through various loan offers quickly, helping you find the most suitable deals without negatively impacting your credit score.

Comparing Loans

Loan Sources and Credit Checks

The initial step in securing a loan involves selecting a lender and undergoing a credit check. This process assesses your financial responsibility and plays a significant role in determining the terms of your loan.

Importance of Repayment History

A solid repayment history can lead to more favourable loan terms. Lenders will require proof of your identity, address, and financial stability to ensure you're a reliable borrower.

How Can You Take Out a Loan?

Loan Repayment Process

Loan repayments typically consist of monthly instalments that cover both the principal amount and the interest. Effective budgeting is essential to ensure you can make these payments consistently and without fail.

Example of Loan Repayment

Consider a £5000 loan with a 9.9% APR spread over three years. This scenario would result in approximately £764.02 in total interest, underscoring the importance of fully understanding the terms of your loan.

Early Repayment and Credit Rating

Paying off your loan early might come with charges, but maintaining a good credit rating is crucial for future financial opportunities. Consistent loan repayments are necessary to keep your credit score in good standing.

How Do You Pay Off Your Loan?

Variety of Loan Types

The market offers a plethora of loan types, including personal loans, mortgages, and car finance options. Each type has unique features designed to meet different financial needs.

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.

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