A loan is when you borrow something, usually money, which is expected to be paid back with interest. A loan gives you some cash upfront, which you repay over a period of time. You will always pay back more than you borrowed due to interest, which ensures that the lender profits from the loan.
There are many types of loan, so if you need to borrow money, consider what you want to use it for when deciding what type of loan will suit your needs. If you have a poor credit rating or history, the loans available to you will be significantly reduced, since lenders will see you as more of a risk and they are concerned that they might not get their money back, if they to lend to you.
There are two main types of loan: secured and unsecured, when conducting a loan comparison it is important to understand the difference between these too types of loans. Within these two categories there are different borrowing options with varying terms and conditions, which will depend on your circumstances. A secured loan is fixed against an item and if the loan isn’t repaid then the item is taken back. Examples of secured loans are car finance, where the vehicle is used as collateral, and mortgages, where the asset the loan is secured against is the property.
An unsecured loan, as the name suggests, is not secured by an asset, so the lender has nothing they can take back automatically if you do not meet the loan terms. Unsecured loans could be, for example, credit cards or personal loans.
The type of loan that is right for you depends on your credit rating and history, the amount you wish to borrow, and what you want to use the money you have borrowed to buy. Secured loans are often taken for larger amounts and as the lender has less risk, they can be easier to get. If you have a poor credit history, you may find that a lender will consider you for a secured loan over an unsecured loan.
Secured loans can also help you to improve your credit score. You may find interest rates are lower on a secured loan and therefore more affordable, but the affordability comes with the risk of losing the item the loan is secured against.
You will usually find restrictions placed on what the funds from an unsecured loan can be used for, and the amount you can borrow will be lower than a secured loan. The interest rate will also be higher than an unsecured loan, but this is because an unsecured loan is riskier for the lender. Unsecured loans are also repaid over a shorter period, and the shorter the repayment period, the higher the interest rate will be. For example, payday loans, which are designed to lend money just for a few days or weeks, will have much higher interest rates than a personal loan taken out for five years.
The only way to get a credit rating is to have had credit. If you have never had a loan or credit card, it is not known how well you manage your repayments, and so you cannot be given a score. For this reason, it is often worth having a credit card and using it just for your grocery shopping, for example, and paying the bill in full every month.
You could also take out a small loan towards the purchase a car, for example, even if you have the money in savings, as you may not want to leave yourself without any savings at all. Both things will, firstly, put you on the credit map, and as you pay your credit card off each month and meet every loan payment on time, your rating will continue to increase. Make sure you use our available loan comparison service to ensure you get the best rate.
If you have struggled with credit in the past, perhaps you took out a loan which you could afford and then your circumstances changed and you missed some payments, your credit rating will be lower than it might otherwise be. Depending on the level of your previous problems, your credit history will restrict what types of loan are available to you.
There are loans becoming available for those with a poor credit rating, to enable access to credit and help to improve their rating, and you can check which loans are available to you by performing a loans comparison.
If you have poor credit you may still be able to take out an unsecured loan, but the interest rate is likely to be higher, and the amount you can borrow will be lower. You are more likely to be able to take a secured loan, but you will need to have something for the lender to secure the loan against.
Another option is a guarantor loan, where someone with a good credit rating commits to making your repayments if you fail to do so yourself. The guarantor is usually a friend or family member. So consider very carefully whether you want take out a loan like this and what effect it might have on your relationship with the guarantor, should they have to make repayments on your behalf.
A further option is a peer-to-peer loan where individuals borrow from other individuals, rather than a bank or building society. The interest rate is agreed upon, and you may be able to borrow larger sums than from a bank, although you will still need to pass a credit check to qualify for the loan. If you opt for a peer-to-peer loan, ensure you arrange it through a regulated platform which gives both you and the lender more security.
Peer-to-peer loans are becoming popular with savers, as interest rates on savings are so low, so peer-to-peer lending can get them a better return on their money.
Ensure any loan you take out is affordable and will not put you into any financial difficulty. You could complete a loan comparison to find the most affordable loan for you.
Comparing loans online is the easiest way to find the best rate. Your quote will be tailored to your circumstances and you’ll be able to compare different lenders. Bright Compare makes comparison simple, convenient and safe, and we’ll help find you the best deal.
Yes. It's a good idea to compare loans if you're not a homeowner. This will give you a better idea as to what you can afford and inform your financial decisions further along the line. Bright Compare will help you find the best rates.
You can compare loans regardless of your employment status. A comparison is the best way to compare rates between providers. Your quotes will take into account your status as self-employed and show you suitable mortgages. Bright Compares makes the process simple and fast.
Bright Compare makes comparing loan deals exceptionally straightforward. We will show you the best deal between lenders, and quotes will take into account your circumstances. We scan a large number of providers and have access to the very best deals.
Comparing loans is even more important if you have bad credit. By running a comparison between different lenders, you will be able to find the best rates to suit your credit score and circumstances. Bright Compare’s streamlined technology takes the stress out of comparison.