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How to Choose a Loan

Although some lenders have become strict about who they lend to since the economic crash, the rise of alternative lenders has offset this a little. It’s true that the very best interest rates are still reserved for those with a good credit record, but even those who have struggled with repaying loans in the past might find they can secure a loan with an online lender.

However, just because you can get a loan doesn’t necessarily mean you should as borrowing always comes at a cost. Remember that defaulting on a secured loan could mean losing your home.

Choosing the right loan is about finding an option that offers you the amount you need with a repayment plan you can afford. If you can find these elements wrapped up in a deal you may have just found the right loan for you.

The main types of loan – secured and unsecured

• Secured loans: Secured loans are offered in exchange for security, usually in the form of a property or a similar high-value asset. Most secured loans are only an option to borrowers who own their homes. Although rates tend to be lower and loan amounts tend to be much larger, opting for a secured loan comes with major risks. If you fail to keep up with your repayments, the lender can force the sale of your home in order to repay the debt.

• Unsecured loans: Unsecured loans are a much more popular option for more casual personal loan customers. While secured lenders can offer hundreds of thousands of pounds to homeowners, repayable over a number of years; unsecured loans are usually for up to around £20,000 and are repayable over a number of months, or around about 5 years. Interest rates payable on unsecured loans are often higher than for secured loans, and credit and affordability checks can be tougher.

Common types of Secured Loan

• Homeowner loans: This is the most common form of secured personal loan. They are available only to homeowners who are willing to put the equity they have in their home forward as security for their loan.

• Car finance loans: Taking out a loan against the value of your car when you buy a new or used vehicle is commonplace. There are various types of car finance deal, but each usually uses the car’s value as security.

• Debt consolidation loans: Some specialist debt consolidation loans are secured against property or major assets.

• Bridging loans: These loans are often used when purchasing homes as a means of bridging the gap around mortgages being agreed, for example They are usually secured against your home.

Common types of unsecured loan

• Standard personal bank loan: Bank loans are often offered based on your credit record and other factors such as your employment status and income.

• Personal loans with alternative lenders: Alternative lenders, such as online-only banks now offer personal loans. The amount you are offered and the term available will depend on your credit score and affordability checks amongst others.

• Peer-to-peer loans: Arranged through online peer-to-peer platforms, these involve members of the public lending to others who need access to funds.

• Short-term loans: Short-term loans are personal loans offered over short periods of time: usually up to around a year. Loan amounts and terms are limited and interest rates can be high.

• Payday loans: Payday loan are extremely short-term loans, which are repayable, usually in one single payment, within days of taking the loan out. High interest rates are commonplace.

• Guarantor loans: Guarantor loans can be offered to those with poor credit ratings who have a loved one who will commit to repaying a loan if the borrower is unable.

Deciding which loan is right for you

Once you’ve decided that you would like to take out a loan, you’ll need to begin by asking yourself several fundamental questions.

1. How much do I need to borrow?
2. How much can I afford to repay each month?
3. Am I comfortable risking my property?

Once you have the answers to these questions, you are halfway there. Check our FAQs for more important areas to consider.

2019 NerdWallet Loan Survey Data

According to our data sample of 2,008 UK adults, 25% of people have missed a payment on one or more forms of debt, while 20% have defaulted completely on a form of debt in the past (i.e. been unable to pay it). Furthermore, our research revealed that 32% of people do not have a clear plan of where and how they will pay off their debt.

In an era of easy credit, these stark figures highlight how important it is to have the right attitude to debt. Find out how to get free debt help here.

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