Loans explained: all you need to know

Loans are a popular way of borrowing a set amount of money over a fixed time period, often with with fixed repayments.

They are often used for large purchases such as a car, home improvements, a special holiday or further study. The best loan is one which has a low interest rate and no extra charges.

Find out more about cheap loans available in the UK and which loan is the best for you in our Guide to Loans.

There are a variety of types of loan to consider. To find the right loan for you, it's a good idea to get a sense of what's available:

Personal Loans - Personal loans, also known as unsecured loans, are loans where your borrowing is based on your personal credit rating. You can borrow up to £25,000 and the maximum amount of time for repaying the loan is 10 years. Most personal loans are for smaller amounts over shorter periods.

Secured Loans - With secured loans you have to use your property as security against the loan. This means that if you default on your repayment, you could lose your home. You can borrow up to £100,000 and the maximum amount of time for repaying the loan is 25 years.

Debt Consolidation Loans - A debt consolidation loan means you move all your debts to one account or loan. For example, if you had some credit card debts and an overdraft, you could take out a loan and use this to pay back all your debts. The idea behind these loans is that they allow you to simplify your finances and cut your monthly payments, often reducing the interest rates you were paying.

There are a variety of different places to get loans from, including:

You need to find the loan provider offering the best deal for you and your circumstances. You can compare loans online to see which is the cheapest and best loan UK for you.

Before choosing your loan it's important to consider the following factors:

You can compare the lifetime cost of loans, monthly repayments and APR with our loans calculator.  Simply enter the amount you want to borrow and how long you want to take to repay the loan.

APR (Annual Percentage Rate) is the headline interest rate figure lenders quote when advertising a personal loan.

This is not as straightforward as it sounds, however, because although a lender may quote an Annual Percentage Rate, you may actually end up paying more or less than that rate.

Why? Because many lenders calculate the APR of a personal loan using a system called risk-based pricing. This means that they assess each individual's circumstances and credit history before deciding what interest rate to offer them.

Although a lender has to offer the headline rate to 51% of people who successfully apply, it's possible that you won't get this rate.

If you have compared loans online, there is usually a button you can click on to take you through to the application page of the lender. You will need to fill in an online form and answer some questions.

Loan companies have to assess how likely you are to be able to repay your loan. So as well as asking for details from you, such as your address and bank details, they will often perform a credit check on you.

They do this by contacting credit reference agencies that hold information on such things as whether you have missed any bill payments, made any late payments or had any County Court Judgments recorded against you. You can check your credit report with Experian.

Some loan providers penalise you if you try to repay your loan early. An early repayment penalty could be the equivalent of one or two months' interest. Generally, the earlier in the term you repay your personal loan, the higher the charge.

However, not all loan companies do this, so if you think you might be able to repay your loan before the end of its term, shop around for a loan that doesn't apply early repayment penalties.

Firms lending money to customers have to be licensed by the Office of Fair Trading (OFT) under The Consumer Credit Act 1974.

The Act also requires that you are given full written details of the true interest rate (i.e. the APR) and in certain situations, you get a cooling-off period during which you can decide to change your mind and cancel the loan agreement

Here is a Glossary explaining all the different terms and wording that you may come across when you apply for a loan in the UK.

It is important to think about how much interest you will pay, what the APR of the loan will be, whether there are any extra charges and how you are going to repay the loan.