A beginner's guide to loans

Exactly what is a loan? What can you use it for and how do you get one? Find answers to all your questions about loans here.
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If you need extra cash to buy something special or pay for an unexpected expense, a loan can be a straightforward and affordable way to borrow money. Loans are particularly useful for borrowing larger amounts of £1,000 or more.

What is a loan?

A loan is a lump sum of money you borrow from a financial organisation that you pay back (with interest) over a set period of time.

There are many different types of loan, but they broadly all fall into two categories: secured and unsecured. With a secured loan you provide an asset as security for the loan that the lender can sell to get their money back if you can’t pay it off.

How do loans work?

To get a loan, you need to apply directly to a lender or through a broker. You can do this online, over the phone, by post or in person at your local bank branch.

Once the lender approves your application, they'll transfer the money directly into your bank account.

You then pay back the loan, normally in monthly instalments, until the total balance is paid off.

If you miss a payment, you'll be charged a fee and extra interest. The amount you failed to pay will be added on to the following month's amount.

Learn about what happens if you cannot repay your loan

What can you use a loan for?

You can get a loan to pay for almost anything but some types of loans are designed to be used to buy certain things, like vehicles.

A mortgage is a type of secured loan that you must use to buy a property. If you can’t pay it back the lender could repossess your property.

The pros and cons of getting a loan

Pros

  • Good for long-term borrowing

  • Interest rates are usually fixed

  • You may be able to borrow up to £50,000

  • It could take less than 48 hours to get the money

Cons

  • You’ll usually pay charges for repaying early

  • You may need to put up your assets as security

  • Payments are often inflexible

  • You need a good credit score for the best rates

How long do you get to pay the loan back?

You can decide how long you want to take to pay the loan back when you apply. It's usually over one to seven years for an unsecured loan, although it could be up to 10.

The longer you take to pay off the loan, the more expensive it will be overall because of the interest charges but the more manageable your monthly payments will be. It’s important to strike a balance between paying as little interest as possible and making sure you’ll be able to afford the repayments each month.

How much can you borrow with a loan?

You could borrow between £1,000 and £25,000 with most types of loan.

  • Smaller loans tend to be over shorter time periods, usually one to three years

  • Larger loans can last for as little as a year but secured loans can be for anywhere between three and 35 years

Where can you get a loan?

A number of different businesses offer loans in the UK, including:

  • Banks

  • Building societies

  • Charities

  • Credit unions

  • The government

  • Peer-to-peer websites

  • Supermarkets

  • Specialist lenders

  • The Post Office

Check our top loan rates

Who can get a loan?

You must be at least 18 years old to apply for a loan in the UK.

You normally have to:

  • Be a UK resident and provide proof of address

  • Be able to pay back the loan, providing proof of your income

  • Pass a lender's credit check

Can you get a joint loan?

Yes, you can apply for a loan with someone else. The lender will assess the personal and financial details of both loan applicants.

You can take out a joint loan with almost anyone, but you usually both have to be over 18 years old, UK residents and each prove you can pay back the loan.

How much do loans cost?

Most lenders charge you interest for taking out a loan. This is a percentage of the money you owe for the duration of your loan. It's called the APR, or annual percentage rate.

Some charge other fees, including:

  • Broker fees

  • Extra fees for transferring your funds quicker

  • Late or missed payment fees

How much the loan costs ultimately depends on how much the original loan was, the loan term and the interest rate.

What is the APR on loans?

APR stands for annual percentage rate. It's the total cost of borrowing over a 12-month period and is displayed as a percentage.

According to the regulator, the FCA (Financial Conduct Authority), the APR must include all the standard costs of getting a loan. This includes any application fees charged by the lender.

Any charge that the consumer must pay to obtain credit must go into the APR calculation.

Lenders have to display a representative APR on all their loans to help you accurately compare rates. At least 51% of successful applicants will get this interest rate or lower when they apply. The remaining 49% may have to pay a higher rate.

This means you might not get the advertised interest rate when you apply for a loan. The exact rate you’ll get depends on your circumstances and how risky the lender thinks you are as a borrower. This is known as risk-based pricing.

What is compound interest on a loan?

Compound interest is where you're charged interest on the interest you've already been charged.

Most lenders charge compound interest on their loans. The best way to find the cheapest loan is to look at the total amount you'll repay over the full term. Use our loan repayment calculator to see how much your loan could cost you.

What will your loan payments be?

Your loan payments include the loan and interest. With most loans, you pay back the same amount every month because the interest rate is fixed for the duration of your loan.

What types of loan are there?

There are lots of different types of loan, but they're all either:

  • Secured loans

  • Unsecured loans

Secured loans

Secured loans are tied to something you own. For example, mortgages are loans secured against your property, which the lender could repossess if you fail to pay it back.

These loans tend to be for larger sums of money over longer periods of time.

Unsecured loans

Unsecured loans are not directly associated with any of your belongings or assets but debt collectors can still come after your assets if you fail to pay back the money you owe.

They're usually for small to medium amounts and tend to last between one and seven years, although they could last for up to 10.

Personal loans are unsecured loans.

Explore more about the difference between secured and unsecured loans

Loan FAQs

Need a loan? Compare loan lenders side by side to find one that is cheap to pay back, lets you borrow what you need and has repayments you can afford.