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We get it. Taking out a loan can be confusing, especially if you don’t understand the process. We’re here to help you break down what you need to know to find the right loan. Retake control of your finances. We’ve got your back.

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Table of contents

Written by Mark Grimley
Read time: ~5 mins
Published: 4th October 2023

What is a loan?

A loan is a way to borrow money from a finance company, like a bank, building society, credit union or specialist lender.

When you get a loan, you must repay the borrowed money in pre-agreed instalments monthly until the debt is cleared.

When you borrow money by taking out a loan, you won't just have to repay the amount you borrowed. You'll also need to pay "interest," which is the cost of borrowing that money.

When you apply for a loan, the lender will tell you the Annual Percentage Rate (APR). This APR shows you how much the loan will cost if you borrow the money for a year.

The higher the APR, the more money you'll have to pay back in addition to the borrowed amount. The APR includes the interest you'll be charged and any other standard fees that come with the loan; therefore, it's essential to check the APR and understand the total cost of borrowing before deciding to take out a loan money.

The loan interest rate you are offered will be based on your financial circumstances, credit history and how much of a risk you pose to the lender.

Loans comparison

How to get a loan

Choose Wisely provides a wide selection of lenders to help you find a loan that fits your needs. Our eligibility checker lets you see if you qualify for a loan without affecting your credit score.

Once you've found the loan that suits you best, you can apply online. Here's a brief overview of the typical loan application process:

  • Fill out your details, including your income and how much you’d like to borrow.
  • You can decide how long you want to take to repay the loan. You can choose a short-term loan, usually paid off within 24 months, or a long-term loan that could last up to 60 months. Remember, the length of your repayment term will determine the amount you need to pay back each month.
  • Your lender will review your details and check your credit history, looking into how you’ve handled credit products in the past and how reliable you are at paying your bills.
  • After reviewing your details, the loan application will be accepted or rejected. If accepted, the loan provider will then offer you an annual percentage rate (APR).

Once your loan is accepted and you’ve received the money, you’ll make your first repayment, either at the end of the month or thirty days after taking the loan out.

You’ll pay off your loan along with interest every month. Interest is charged because that’s how loan companies profit from lending you money.

What can you use a loan for?

Common reasons for taking out a loan include:

  • Buying a car
  • Making home improvements
  • Paying for an emergency repair
  • Consolidating debts
  • Paying for a holiday
  • Covering wedding costs

There's no right or wrong thing to spend a loan on; it's entirely your call as long as it’s within the lender's terms. Before getting a loan, make sure you can afford the monthly repayments over the entire period of the loan and don’t forget to add the repayments to your budget.

If you’re struggling with budgeting, several free apps are available to help you keep on top of your spending and avoid falling behind on bills and credit repayments.

What are the different types of loans?

Various loan options are available, each suited to different needs. Knowing which type of loan is best for you can be confusing, so we’ve broken down the different kinds of loans below:

Unsecured personal loan

An unsecured or personal loan is a popular option and isn’t designed for a specific purpose; you can use the loan for whatever you want, providing it doesn’t go against the lender's terms.

Personal loans don’t need to be secured against your home. Because of this, interest rates on unsecured loans can be higher than those on secured loans. If you don’t own a property, you’ll only be able to get a personal loan.

Secured loans

With secured loans, your home or other high value asset is used to guarantee loan repayment. If you can't keep up with your monthly loan repayments, your home could be repossessed, and the lender can sell the property and use the funds to pay off the loan.

Secured loans are considered less risky for lenders because your home guarantees they will get their money back if you do not repay what you owe. Because of this added security, you can often borrow more money with a secured loan, with lower interest rates, even if you have a poor credit history. These loans are also spread over an extended period, making each monthly repayment more affordable.

Specific purpose loans

Particular loans are designed for specific purposes, meaning they can only be used to pay for certain things. For instance, you can get a car loan to purchase a car or a home improvement loan to upgrade your house.

The advantage of these loans is that they typically come with lower interest rates than general personal loans.

Bad credit loans

Bad credit loans are specifically created for individuals with a poor or limited credit history. Since borrowers with a low credit score are considered higher risk by lenders, these loans often come with higher interest rates than standard personal loans.

If you consistently repay a bad credit loan on time, it can help improve your credit score. As your credit score improves, it becomes easier and more affordable to borrow money in the future. So, responsibly managing a bad credit loan can lead to better financial opportunities in the long run.

Guarantor loans

A guarantor loan is a type of lending where a third party, typically a friend or family member, “guarantees” the loan. This means that they agree to make the repayments if you fail to do so.

When applying for a guarantor loan, the person who guarantees the loan for you will also have their affordability and credit report checked.

These loans tend to have a higher APR than other loans but can be a good option if rejected elsewhere.

Payday loans

Payday loans are a type of high-cost short term loan. They’re designed to help tide you over until your next payday if an emergency expense has hit you.

Payday loans have a bad reputation, primarily because of rogue lenders who’ve since been removed from the market. In recent years, payday loan costs have been capped under new rules by the Financial Conduct Authority (FCA).

When used sensibly, payday loans can be a helpful way to help you cover your expenses in emergencies.

Bridging loans

A bridging loan is short-term lending designed to be repaid in one lump sum.

These loans are commonly used when you want to buy a new property but are still waiting for your current home's sale to be completed. They can also be helpful if you've purchased a property at an auction and are waiting for your mortgage application to be finalised. Once your current property is sold or your mortgage application is approved, you can use the proceeds to pay off the bridging loan.

With a loan like this, you have options for paying back the interest. You can make monthly payments to cover the interest or add the interest to the loan amount and repay it when you've raised the necessary funds.

Put simply a bridging loan provides temporary financial support to help you manage the gap between buying a new property and selling your existing one or securing a mortgage.

How much do loans cost?

When you take out a loan, you'll be charged interest on top of the original amount you’ve borrowed.

The APR of the loan dictates the total amount you’ll repay.

For example, if you've taken out a loan for £4,000 and agree to pay it back over twelve months with a 20% APR, you'll need to pay back approximately £4,400. This is an illustrative example, and the exact payment term will be agreed with your lender.

The loan length also plays a part in determining the cost of your loan. The longer you take to repay what you’ve borrowed, the more time your balance accumulates interest, resulting in a more expensive loan.

Because of this compound interest, a loan of £4,000 with an APR of 20% spread over ten years will cost more than the same loan over five years..

Compound interest is essentially interest on interest, so if your monthly repayments don’t cover the interest applied to your loan each month, the interest added to the balance you owe will accrue interest the following month.

Although the total cost to you is greater, spreading a loan over a longer term will reduce your monthly repayments making it more affordable in the short term.

Different loan types can have significantly different APRs. A bad credit or guarantor loan usually has a higher APR than other personal loans. Your credit history and income can also impact the APR you're offered when you apply.

Calculate the costs of your loan

Choose Wisely has a Loan Calculator to help you better understand the cost of loans and find the right loan for you.

If you’re not in a rush to borrow money, taking time to improve your credit score could help to improve your chances of being offered a more competitive interest rate.

Some lenders will charge additional fees associated with their loans, such as:

  • Paying off the loan early - called an early exit fee
  • Missing a repayment - called a missed payment charge

These extra charges can increase the overall cost of your loan.

How can I improve my credit score?

Improving your credit score can make it easier to get a loan with more favourable terms. Here are some things you can do to boost your credit score:

  1. Check that the details on your credit report are current and correct; if not, contact the credit reference agency to report any mistakes or missing information.

  2. Make sure you are on the electoral roll and registered to vote because this helps to prove your fixed address

  3. Use an eligibility checker before you apply for credit to avoid multiple hard credit checks and rejected applications, which can harm your credit score

  4. Ensure you pay any bills or credit repayments in full and on time.

  5. Refrain from making multiple applications for credit within six months

How do I know if I'm eligible for a loan?

Each lender will have their own eligibility criteria. The requirements you’ll need to meet will differ depending on the type of loan you’re looking for.

For example, if you have a poor credit score and you’re struggling to get a personal loan, you may need to opt for a loan from a bad credit lender. Or, if a traditional bank declines your loan application, you may be accepted by an online lender.

Your credit score, creditworthiness and affordability will typically determine your eligibility.

Despite the different criteria between lenders, all will require you to be over 18, a UK resident, and pass a hard credit check.

Before applying for a loan, don't guess your eligibility. Use our eligibility checker to increase your chances of approval. It's better to be informed before submitting your loan application.

When you apply for a loan, the lender will do a hard search on your credit report. Multiple hard searches within a short period can negatively impact your credit score, making it seem like you're facing financial difficulties.

To avoid this, use our Eligibility Checker before applying for a loan. It will show how likely you are to be approved without affecting your credit score. This way, you can gain insights into your credit report and apply for loans with more confidence.

What do I need to apply for a loan?

Specific requirements may vary depending on the type of loan you're applying for and the lender's policy, but you'll typically need the following information to hand:

  • You'll need to provide basic personal details, such as your name, date of birth, address, and contact information.
  • Lenders may require a form of identification, such as a valid passport or driver's licence to verify your identity.
  • You'll need to demonstrate your ability to repay the loan, which typically involves providing recent bank statements or pay slips to prove your income.
  • Some lenders may require employment information such as your job title, employer's name and contact information.
  • Lenders will assess your creditworthiness by checking your credit history. This helps them determine the level of risk associated with lending money to you.
  • You’ll need to specify the amount you want to borrow and the purpose of the loan, for example, for a specific purchase or debt consolidation.
  • If you're applying for a secured loan, you’ll need to provide information about the collateral you're offering (e.g. your home or vehicle).
  • Lenders will ask for your UK current account information to arrange direct debit payments for loan repayments and to transfer the borrowed money to you.

Pros and cons of personal loans

  • Provides access to funds for significant purchases
  • Help manage short-term cash flow problems
  • Can contribute to improving your credit report
  • Quick and straightforward approval process
  • Offers flexibility in how you use the borrowed money
  • High APR potential
  • It can harm your credit score if you miss payments
  • Some loan providers charge unavoidable fees
  • Fees and penalties for missed payments

Are there any alternatives to loans?

Before deciding on a loan, exploring alternative borrowing options is essential to ensure you make the right choice. Here are a few alternatives to consider:

Credit cards

Credit cards can be an alternative option for borrowing small amounts over a short time. They offer the flexibility to borrow as needed. While some credit cards have high-interest rates, having a good credit history may qualify you for an interest-free period, avoiding interest charges if paid within that time frame.

Borrow from friends and family

Consider borrowing from family or friends to alleviate financial difficulties. While it might only be feasible for some and could feel awkward, it can help you to avoid high-interest charges. To protect your relationship with your loved one, it’s important to document the borrowed amount and repayment agreement to provide reassurance and clarity for both parties.

Salary advance

The week before payday can be challenging, especially when money runs low for essentials like food and fuel. If you need a small amount to get by, consider asking your employer for a cash advance. Remember that this will result in a smaller paycheck next month since you've received part of your pay early.

Loan FAQs

Can I get a loan with bad credit?

Even if you have a poor credit history or face rejections from high-street banks, you may still be eligible for a loan from a bad credit lender. Traditional lenders sometimes turn away people with poor or no credit history, so applying with a specialist loan company or credit union that caters to individuals with bad credit may increase your chances of approval. However these loans may be more expensive due to higher interest rates.

How much can I borrow?

Lenders set specific minimum and maximum amounts they're willing to lend, which can vary depending on the loan type and term.

Your personal financial situation influences the amount you can borrow. Lenders assess your disposable income, which is what remains after paying bills and credit repayments, to determine your borrowing capacity.

For unsecured loans, the average maximum amount is around £10,000. However, with secured loans using your home as collateral, you can borrow more, usually up to £500,000, based on the value of your home.

Can I pay off my loan early?

You can, but you may have to pay an early repayment fee, also known as an early exit fee, which can be expensive. Typically an early exit fee will cost the same as two monthly repayments.

What if I can't afford to pay my loan back?

Contact your lender immediately if you struggle to keep up with your loan repayments.

They should be able to work with you to come up with a plan for repaying your loan, either by extending your loan term so you can make smaller monthly payments or by offering you a short repayment holiday so you can get back on your feet.

Missing repayments will result in late payment charges, which along with interest, can mean your debts will soon build up.

If you’re unable to pay back your loan, your debt may be sold to a third party who could choose to take you to court. This can seriously affect your credit rating, making it harder to get accepted for any credit products in the future, including mortgages, credit cards, mobile phone contracts and car finance.

Failure to repay a secured loan could result in your home being repossessed to cover the outstanding debt.

Will a loan affect my credit score?

Yes, it will. All lenders will perform a hard credit check before final approval on a loan, which is marked on your credit file and visible to other lenders.

If you manage your loan well by repaying what you owe on time and clearing the debt, you’ll likely see a positive impact on your credit report over time as you’ve demonstrated that you’re a reliable borrower to future lenders.

But, if you’re late paying or miss repayments, it will harm your credit score, making it tougher to get credit in the future.

Written by
Mark Grimley
Head of Partnerships & Take Control Author at Choose Wisely

Mark joined Choose Wisely in 2015. He continues to work in close contact with the providers, brokers and journalists operating in the world of consumer credit.

Important Information.

All of the information in this guide is correct at the time of writing.

If you complete a loan search application on the Choose Wisely website, the rates shown may vary based on your personal circumstances, are subject to status and are available to those aged 18 and over. Rates available range from a minimum of 13.9%APR to a maximum of 1721%APR Representative and loan repayment periods range from 3 to 60 months.

If you need financial advice you can visit stepchange, speak to citizens advice, call the national debtline or speak to

If you've been declined, please refer to your credit report to gain an understanding of why before making further applications.
You can access your credit report for free from Credit Karma, Clearscore or Experian.

Warning: Late repayment can cause you serious money problems. For help, go to