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? Check out our top tips on borrowing 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’s 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.
Our handy guide explains the difference between secured and 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?
If you’re thinking about paying off your loan early, speak to your bank to find out how much it might cost to pay it off before the end of your agreed term.
5. Can I change my mind about a loan?
Generally yes, you can. Just like you might be offered a cooling off period after joining a gym or signing a phone contract, some lenders will offer the same.
Banks typically give you up to 14 days after receiving your confirmation letter to change your mind and let them know you don’t want the loan anymore.
If you decide to cancel your loan, you’ll have to repay the loan, plus any interest, within 30 days of notifying your 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 offering you a loan, your bank will want to know how well you manage your money, and that you'll be able to pay the loan back. 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.
Even if your credit score is lower than you’d like it to be, there are loans available for people with poorer credit scores. However, the terms on offer might not be as good as they would be if you had a higher credit score.
8. Can a loan affect my credit score?
Taking out a loan will impact your credit score straight away.
Making your monthly payments on time can positively impact your credit score and it could indicate reliability.
If you take out a loan and can’t stick to your monthly payments, you may end up negatively affecting your score.
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.
The content on this page aims to offer an informative introduction to the subject matter but does not constitute expert financial advice specific to your own situation. All facts and figures were correct at time of publication and were compiled using a range of sources.