8 things you need to know before taking out a loan
Looking for a loan to cover the likes of a new car, a wedding or even to consolidate your debt? Be sure to check out our eight top tips for being a savvy borrower first.
1. How do loans work?
A loan is an agreement between you and a bank. Basically, they’ll agree to lend you a certain amount of money and you’ll agree to pay it back over a set number of months or years.
When you borrow money for things like a new car or a home improvement, it’s typically called a personal loan. Your bank will charge interest on the money you borrow. Your interest rate will depend on the bank, the loan amount, your circumstances and your credit history.
2. What is the difference between a secured and unsecured loan?
There are lots of different loans out there, but they can typically be split into two main types – secured and unsecured.
- Secured loans use an asset, usually your home or car, as security in case you can’t pay it back.
- Unsecured loans won’t be secured against your home car or other asset. Instead, banks check things like your salary and credit score to see if they feel comfortable lending you money. It’s worth noting that most personal loans are unsecured loans.
3. What should I look out for in a bank loan?
If you’re thinking about getting a loan, take your time to find out what different lenders are offering. You might want to look at:
- How good the APR is so you can see how much interest you’ll be paying
- What the length of the loan is
- How much you’ll have to pay back altogether after interest – also known as the total amount payable
- How much you’ll be expected to pay each month
- What charges or fees there are for things like late or early repayments
- What the terms and conditions are
To get an idea of the cost of interest rates and repayments, check out our Loans Calculator.
4. Can I pay back a loan early?
Paying your loan off early might save you money on interest but you could be charged for doing so. You should speak to your bank to find out how much it would cost you, if you paid off your loan before the end of your agreed term.
5. Can I change my mind about a loan?
You might have come across cooling off periods when joining a gym or taking out a mobile phone contract. Some loans are just the same. Banks typically give you up to 14 days after receiving your confirmation letter, to change your mind and inform them, that you no longer want the loan. You will then have to repay the loan (plus any interest up to the date you repay) within 30 days of notifying the bank.
6. What do I need to apply for a loan?
When you apply for a loan, your bank is going to want to see a few things. These are likely to include:
- Your current address
- Your salary and employment details
- Your monthly incomings and outgoings
- Your credit history
7. Do I need a good credit score to get a loan?
Before agreeing to give you a loan, your bank will want to know how well you’re likely to handle the agreement and the easiest way is to check your credit score.
Your score looks at a few different things, like your income, current debt and credit history, to work out a rating.
Right now, you might be wondering can I get a loan even if I have a bad credit rating? The good news is that there are personal loans for people with bad credit out there, although the terms probably won’t be as good as they would if your score was higher.
Another little help: There are things you can do that could improve your credit score. Find out more in our Credit Rating Guide.
8. Can a loan affect my credit score?
Personal loans can affect your credit rating. On the upside, paying back a loan on time could give your rating a boost.
However, failing to make your repayments will count against you and so can being turned down for a loan. Hold off applying until you've done everything you can, to help ensure your application is successful.
Before picking your personal loan
A personal loan could give you money in the bank for your next big purchase – just make sure you’ve carefully reviewed your finances and know how you’ll pay it back before you apply.