Loans

If you are thinking of taking out a loan to pay off your debts, you will need to think very carefully about whether you can afford the repayments and whether this is the best option for you. Take a look at our Dealing with Debt section to see what other action you may be able to take to reduce what you owe.

There are certain times in life when you may need to take out some sort of loan. When buying a house for instance. Very few people can afford to pay outright, so take out a mortgage. Similarly, when going to university, most people need to take out a loan to cover their tuition fees and living costs. This section of the site covers different types of loans, where you can get them and what they’ll cost you.

  • Loans can either be secured or unsecured (also known as personal loans). Secured loans offer you more money and a better rate of interest, however if you do not keep up with repayments the creditor may be able to repossess your home, so you will need to think very carefully before agreeing to this type of arrangement. Secured loans may also have variable rates, while personal loans are more likely to have fixed rates. If you have a fixed rate then you will know exactly how much you will have to pay back each month, whereas with a variable rate, the amount can change depending on whether the lender decides to put rates up.

    It’s really important to consider different types of lenders as the differences in what they charge can be huge. Take a look at the table below, (based on information from DirectGov) to show the cost of borrowing from different lenders:

    Lender/RatesIllegal lenderHigh cost
    credit provider
    Doorstep
    lender
    Credit
    Union
    Ammount of loan£300£300£300£300
    Typical APR1000%246.50%117%12.7%
    Terms of loan (weeks)52525552
    Weekly repayment£55.50£17£9£19.80
    Total interest£2700.32  £495£195£19.80
    Total repayment£3000.32£884£495£319.80

    As you can see, for the same amount of money over a similar period of time, some lenders can charge much more than others. The most expensive loan in the table costs more than 9 times what the cheapest costs. The important thing to look at here is the Typical APR as this shows you how much the loan will cost overall – the higher the APR, the more expensive the loan.

    Also, beware of companies trying to get you to take a bigger loan than you really need or trying to sell you insurance with your loan. Never buy anything if you feel under pressure. Take some information away with you and if possible talk it over with someone you trust before you commit yourself to anything.

    Take a look at our Buying on Credit section, which gives information about credit cards and hire purchase arrangements. Depending on what you need the money for and how quickly you are likely to pay it back, you may find a credit card could offer a better deal. These normally give you a period of time in which you can pay the balance off without incurring any interest at all, meaning your borrowing is free. You must be sure that you will be able to pay the money back though; otherwise this can be the beginning of a slippery slope that could see your debt spiral out of control.

  • Have a look at our Credit Unions section to find out more about joining a credit union. These can be a great option for getting a really low rate of interest on the money you borrow, meaning you don’t have to pay back as much as you may need to otherwise.

  • CDFIs aim to provide loans at competitive rates to businesses and individuals who may struggle to get a loan from a bank, building society or other high street lender. They are not-for profit organisations, so they do not aim to make money from their customers. This means they keep costs as low as possible and avoid charging the high APRs associated with doorstep or payday loans. collapse section


    CDFIs also help you open a bank account for your loan to be paid into, allowing you to begin building up a relationship with your bank and improving your credit record. A similar type of service is provided by Street UK here. For more information on local CDFIs, see:
    1. Greater Manchester Moneyline  
       
    2. East Lancashire Moneyline 
       
    3. Lancashire Community Finance
  • These are loans from the government to help those who have no savings of their own and are in need of money. 

    You can visit the Citizens Advice website for more information and to apply here
  • Banks offer different types of loans depending on your circumstances. Loans such as a mortgage are a special type of loan you will need to look into very carefully. It is worth thinking about what it is that you need the loan for, and whether you could wait and save up, or buy cheaper elsewhere. If you are looking at buying a new car, do you need to get it straight away, or could you save for a few months and avoid having to take out a loan? It is always best to use savings if possible, as it will cost you to borrow money. collapse section

    If you decide you do need the car immediately for some reason (for instance, to get yourself to work) then you may decide it is worth borrowing the money. In this case it is really important you shop around as much as possible to make sure you’re getting the best deal. If you already have an account with a bank, then this might be a good place to start as they could offer better deals for their own customers. This is not always the case, so don’t be afraid to look elsewhere before making a decision.
  • Several companies may offer you a consolidation loan if you are in debt. The idea is that this can be used to pay off all your creditors and leave you with more manageable weekly or monthly repayments which only need to go to one company, making life easier for you. In reality these can carry high rates of interest, and as you are only paying off a small amount of the loan at a time, you could find yourself still paying years in the future. This is why it’s important to check not only how much you will have to repay at a time, but how much you have to pay overall.

  • These are lenders who will come round to your house to loan you money and then to collect payments from you. They are often prepared to give loans to people with a bad credit history.

    These groups have faced huge amounts of criticism for charging very high rates of interest, which means it is very expensive to borrow money from them. For this reason they are best treated as a last resort if you really cannot get a loan from anywhere else. The government has produced a comparison site for doorstep lenders, you can visit the site here, if you are considering borrowing from one of these companies you can make sure you are getting the best deal available.

  • ‘Loan sharks’ are money lenders who do not have a license to lend money, You can check the Consumer Credit Register here to see if your lender is licenced.

    Signs someone is a loan shark may include:

    • They do not give people any paperwork with the loan. This can make it very difficult to keep track of how much you owe.
       
    • They charge extremely high rates of interest – rates of between 8000% and 117,000% have been uncovered. If you compare this to the other rates shown in our table above, you will see how high this is.
       
    • They use threats and violence to recover money – particularly if payments are missed.


    If you have borrowed money from an unlicensed lender then they have broken the law and you can not be legally made to repay the money you owe to them. You can report a loan shark in confidence by:

    Visit the DirectGov Report a Loan Shark website for more information.

  • Most people who are buying a home will need to take out a mortgage. These are complex and you will need to make sure you shop around and get plenty of advise before you sign up. Check out our Mortgages section to get you started.

  • When going to university, most people will need to take out a student loan. There are two separate loans which you can apply for: a maintenance loan to help with your living expenses and a tuition fees loan to cover your fees in full. You won’t have to pay this money back until you’ve finished university and are earning a certain amount which should mean you are able to afford repayments. See our section on Help for Students for more information.

Facts and Figures

Total UK personal debt at the end of May 2016 stood at £1,479 trillion.

Banks write off £20.71 million of unpaid loans every day.

The average household in the UK owes £55,854 (including mortgages)