10 things you need to know before applying for a loan

With redundancy levels rising, thousands of households are having to borrow for the first time.

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If you’ve never had a loan before, the good news is that assuming you have a good credit rating, rates have edged downwards in recent weeks. However, you may be totally confused about what to look for, so we’ve compiled a list of 10 things you need to know before you make an application. 

You can only borrow up to £25,000 with an unsecured loan

There are two types of loan – secured and unsecured.

Unsecured loans are aimed at people who want to borrow a relatively small amount – they tend to be available for amounts between £1,000 and £25,000.

A secured loan is held against your property

Secured loans (also known as ‘homeowner loans’) derive their name from the fact that the debt is held against your property. This means your home is at risk and may be repossessed if you fail to keep up with your monthly repayments. 

The minimum loan size on a secured loan is usually around £10,000 and you may be able to borrow up to £100,000. However, the maximum loan size could be lower as it will depend on how much equity you have in your home.

You may not be offered the rate you see advertised

The advertised rates you see on many loan deals are ‘typical rates’ which means that the loan provider uses a strategy called risk-based pricing. At least 66% of successful applicants must be offered the typical rate but a third could be offered a higher rate.

The best rates are available to those with the best credit scores

The rates on unsecured loans have been getting more competitive in recent weeks (see below for the current best deals) but only those with excellent credit ratings will qualify.

The longer the term, the more interest you’ll pay

The cost of your monthly repayments will obviously depend on the amount you are looking to borrow, but it is also dependent on the period over which you will repay the debt.

You can reduce your monthly repayment by opting for a longer term. However, this will be more expensive because you’ll pay more in interest.

For example, if you borrowed £5,000 over five years on one of the market-leading loans at 7.9% your monthly repayments would be £101.14 and you’d end up paying back £6,068.57 in total – more than £1,068 in interest. By contrast if you cut the loan term to three years your monthly payments would increase to £156.45 for a total repayment of £5,632.25. That’s a saving of more than £400 over the lifetime of the loan.

Therefore, base the term of your loan on the maximum you can afford to pay each month.

A credit card may be a better option for short term lending

If you only need to borrow over a very short term – say 12 months or less – then you may be better off with a 0% purchase card. By making a purchase on a 0% card you will have the length of the introductory offer in which to pay back the money you owe without paying any interest. Don’t be tempted to keep spending until you have cleared the balance however, because at the end of the 0% period you will be charged interest at a much higher typical rate. Check out our credit cards section for 0% offers.

It can cost you to pay back the loan early

Many secured loan lenders charge early redemption penalties. These effectively penalise those who can repay early because the lender is missing out on a sizeable chunk of interest. For amounts borrowed of less than £25,000, penalties are restricted to just two months’ worth of interest – but for larger amounts the penalties can be much steeper.

There may be other hidden fees

Read the lender’s terms and conditions thoroughly before applying for a loan and check for hidden fees. For example several lenders charge administration or arrangement fees to set up a loan, while others will penalise you for making late payments.

Your repayments may be variable

The rates on unsecured loans tend to be fixed, but many secured loans have variable rates so your repayments could rise. Make sure you know what you are signing up for otherwise you could get a shock if your lender suddenly hikes the rate.

You don’t have to buy PPI when you take out a loan

Payment protection insurance (PPI) is designed to cover the cost of loan and credit card payments if you are unable to work due to accident, sickness or unemployment. Many people wrongly assume that it must be bought from the same bank or building society they are borrowing from. It doesn’t. Nor does it have to be bought at the same time a loan is taken out.

You will often get a better deal from a standalone provider, so if you want this protection, make sure you shop around and compare prices and the level of cover, before you buy.

However, if you are currently out of work, now is probably not the time to purchase PPI as you won’t be eligible to make a claim.

If PPI is something you’re interested in our PPI comparison tool enables you to compare products. We also discuss PPI in more depth in our latest video ‘Payment protection explained’.

So what are the best deals?

In terms of unsecured loans, both the Sainsbury’s Personal Loan and Nationwide Personal Loan offer rates of 7.9% but they both come with a catch. The Sainsbury’s deal is available for loans between £5,000 and £15,000 to Sainsbury’s shoppers with a Nectar card; while the Nationwide loan is only available to Nationwide Flex Account debit card and mortgage customers – the minimum loan size on this product is £7,500 and you can borrow up to £14,999. Alternatively, the AA, and Tesco have unsecured loans with rates of 8%. The AA deal is available for loans between £7,000 and £25,000, while Tesco’s deal is available on loans between £5,000 and £14,999.

The Blackhorse Personal Finance Loan has the leading secured loan rate in the UK and can only be found at moneysupermarket.com. It offers a headline rate of 7.9%.

If you’re unlikely to qualify for the leading rates, use our loans comparison tool to compare more of the options available to you.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing. Products underlined can be applied for directly.

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