Choosing the right type of loan

It’s important to take out the right loan for your situation. We’ve broken down every type of loan you’ll find on TotallyMoney, so you can do your research and look at all your options before you make an application.

Choosing the right kind of loan could make your loan cheaper, lower any risk of missing repayments and help protect your credit score.

Picking the wrong loan, on the other hand, could cost you more money, damage your credit score or in the worst case scenario, you could lose your home if you’re unable to keep up with repayments.

A personal loan is a good option if you have a good credit record and need to borrow between £1,000 and £25,000.

Personal loans from a bank or lender are not secured against an asset, such as your home, so they are known as “unsecured loans.”

They usually have relatively short terms ranging from 12 months to seven years.

Personal loans are often advertised with low interest rates that can make them look very cheap — but you could end up with a higher rate if your credit score isn’t perfect.

Homeowner loans are suitable for homeowners who are happy to take out a loan secured on their property. You’ll need sufficient equity in your home to do this.

Homeowner loans are sometimes called “secured loans.”

You can borrow more money with a homeowner loan — up to £100,000 — but the exact amount will depend on the amount of equity in your home, how much you can afford to repay, and how long you want to make repayments for. Interest rates can be quite competitive and terms can be for as long as 25 years.

Even if you have a lower credit rating and are not eligible for personal loans, you might be able to get a homeowner loan.

All this might sound great, but homeowner loans are high risk. The loan is secured against your property, so you could lose your home if you don’t pay it back.

A homeowner loan can be taken out on a property where the mortgage is paid off, or as a second mortgage on a property.

In the event you can’t repay the debt, the lender can take repossession action against you.

If you sell your home, or it’s repossessed, the first charge mortgage gets cleared in full before any money goes towards paying off the second charge, although the second charge lender can pursue you for the shortfall.

Missed payments can also damage your credit score, so make sure you can afford the repayments.

Homeowner loans can also work out expensive in the long run. If you spread your payments over 25 years, you’ll pay a high amount of interest overall.

You can use a personal loan to buy a car, but there are several other options too.

“Hire Purchase” is a loan secured against the car you’re buying. If you don’t keep up with your monthly payments, the car could be taken away. You’ll need to make an extra payment at the end to own the car.

“Personal Contract Purchase” is another popular way to buy a car. The monthly payments are usually cheaper than for hire purchase but you’ll need to make a much bigger payment at the end to take ownership of the car.

If you have poor, little, or no credit history, it doesn’t mean you can’t get a loan. You might be able to get a bad credit loan.

Bad credit loans typically charge higher interest rates than other loans. This means it’s even more important than usual that you’re sure you can afford to repay the loan each month. The high rates mean you could end up paying a lot more back than you initially borrowed.

The amount you can borrow will often be less. This helps lenders reduce the risk of you not paying the money back.

Before applying for a bad credit loan, you should check to see how likely you are to be accepted by lenders.

By checking your eligibility first you can avoid being rejected. Some lenders will even offer a guaranteed rate, so you know the interest rate before you apply, and know exactly how much you’ll repay every month for the loan duration.

If you have a bad credit history and don’t own a property, you might be eligible for a guarantor loan. For this type of loan, you’ll need a friend or family member to sign the loan agreement with you. They will be your guarantor.

By acting as a guarantor, a third party can give lenders more confidence that the money will be repaid. If you don’t make repayments, the guarantor can be held responsible and chased for the debt. If the guarantor doesn’t make the repayment, the default will be recorded on both credit files.

The lender will carry out hard credit checks on both you and your guarantor, and assess the affordability of the loan, before deciding whether to accept you or not. Your guarantor will need a good credit rating and, in some cases, to be a homeowner. It’s important that your guarantor understands that being a guarantor could affect their future credit applications.

Guarantor loans can have high interest rates and can be risky — and not just financially. Think about how it could affect your relationship with the guarantor. But, on the plus side, if you make payments on time, this type of loan can boost your credit score.

APRs on loans are normally higher for small amounts than larger amounts. The lowest interest rates are usually offered to people borrowing more money.

If you’re looking to borrow a smaller sum, you should compare the cost with that of a credit card. If you’re eligible for a 0% interest credit card, this could work out cheaper.

If you think a credit card would be a better option, check your eligibility for cards with TotallyMoney to help you find the best card for you. You can see your likelihood of acceptance before you apply.

But for larger amounts, a loan will usually be more suitable as you can borrow more than on a credit card. The APR could be lower too, and the fixed repayments will make it easier to plan repayments.

Loans can also be more flexible. Once the money is in your bank account you can withdraw it as cash or spend on your debit card. In comparison, you should avoid using credit cards to withdraw cash, and some credit cards aren’t accepted everywhere.

Even if you’re struggling to be accepted for a loan elsewhere, payday loans are rarely the best option. They have very high interest rates, and costs can spiral if you miss a payment. If your credit history is already poor, using a payday loan could make it even worse.

Take some time to find the right loan for your situation. Don’t apply without doing your research and consider all options first.

Too many rejections in a short amount of time can make it harder to be accepted for credit in the future. So, when one lender says no, they often all do. TotallyMoney’s eligibility checker lets you know if you’re likely to be accepted — with no harm to your credit rating.

You should also check your credit report before applying to make sure your details are correct. If anything’s wrong, you can raise a dispute through TotallyMoney’s service.

Whatever type of loan you take out, you need to be sure you can afford the repayments. Missing payments can damage your credit rating, and with secured loans you risk losing your home or vehicle too.