What are the different types of loans?

When you get a loan, you borrow a certain amount of money and agree to a set repayment schedule. Loan repayments are typically more predictable than credit cards, which can make them easier to budget for – although the rates may be higher for borrowing small amounts.

There are several different types of loan, each with its own risks and benefits. It's important to know which type suits you before you apply.

Why do you need to borrow?

When you’re thinking about what kind of loan is right for you, the reason you’re getting the loan in the first place is really important. There are plenty of good reasons for getting a loan. For instance, you might want to buy something expensive such as a car or go on a special family holiday.

Another reason might be to consolidate your existing debts. A new loan might bring down the interest you’re paying each month, as well as making it simpler to manage your debt as you’ll only have one monthly payment to think about. Do consider any negatives though. For example, you may end up paying more in the long run if you increase the length of the loan.

Here are the main types of loans available.

Personal (unsecured) loans

Personal loans allow you to borrow relatively small amounts, such as £1,000 although they can go much higher. Many people use them to spread the cost of a large purchase. You won't have to use an asset (such as your house) as collateral, which means less risk for you. However, you'll probably need a high credit score to get a good interest rate.

Find out more about personal loans

Secured loans

These loans use an asset, such as your home, as collateral – meaning you could lose the asset if you can't keep up with repayments. But a secured loan can still be suitable if you're confident you can stick to the payment schedule. Collateral lowers risk for the lender, so you may be able to get better rates or higher amounts with a secured loan – even if your credit score's low.

Find out more about secured loans

Guarantor loans

These loans require you to have a guarantor – that’s someone who promises to repay the loan if you can't. This is usually an older relative or friend, although it can be almost anyone who meets the lender's criteria. These loans carry risk for both the guarantor and borrower – but if you have a low credit score, using a guarantor can improve your chances of getting a loan.

Find out more about guarantor loans

Car finance loans

Need to spread the cost of your new wheels? There are several ways you can finance a car, whether you want to buy it outright, pay for it in instalments, or just rent it. Each option has different pros and cons, so there's a lot to consider before you apply.

Find out more about car finance

Payday loans

These are short-term loans, and usually for relatively small amounts of money. The good news is that they can be easy to get. But beware of the interest rates as they can be much higher than the average personal loan. Make sure you shop around and compare rates across payday lenders before you apply.

Find out more about payday loans

Debt consolidation loans

A debt consolidation loan lets you bring together all of your existing loans into one more manageable debt. When working out how much you’d save, add up the total amount you owe on your loans, and look for a loan for that amount.

Not only could you save on the total amount you pay out each month, but you could also find it a lot simpler just having to make one payment instead of several to different lenders. Make sure you check you’re happy with the length of the loan period, as it might mean you’re paying off your debt for longer.

Find out more about debt consolidation loans

Loans for bad credit

If you have a low credit score, you might find it tricky to get a loan because lenders see you as a higher risk. There are some loans available for people with bad credit, but it’s important to take into account the interest rates as these could be high and make a big difference to the amount you’ll be paying back each month.

Although your options might be limited, you could still get a loan. We can help you compare loans, and see what’s out there, even with a low credit score.

Find out more about loans for bad credit

Logbook loans

If you own a car and are looking for a quick way to get cash, you might be able to get a logbook loan. But be aware that these are among the most expensive and risky types of loans. They are a type of secured loan that lets you borrow money against your car. This means your lender may take away your car if you don’t keep up with the repayments.

When you take out the loan your lender will ask you to hand over your logbook (or ‘vehicle registration certificate’). You’ll also need to sign a bill of sale that gives the lender temporary ownership of your car. You can still use your car while making payments on your logbook loan. But you’re not allowed to sell your car or get your logbook back until the loan is repaid.

Find out more about logbook loans

What to consider before taking out a loan

Taking out a loan is a big decision and shouldn’t be taken lightly. In most cases, you’ll be paying off the loan over several years, so you need to be sure it’s the right thing for you.

It might be useful to ask yourself:

• Can I afford the repayments? – Think about how much you can afford to pay back each month and make sure you’ll be able to meet the payments
• Which type of loan is best for me? Do your research and find which is right for you. Interest rates can vary a lot between different types of loans
• Am I likely to be able to get this loan? If you make too many applications in a short time this might harm your credit score
• Might a credit card be better for me? Loans offer more certainty as the payments are the same each month, but credit cards can be more flexible and offer other benefits too

With Experian, you can compare loans from a variety of companies. Plus, you'll see your eligibility rating for personal loans, helping you understand your chances of approval before you apply.

Just remember, we're a credit broker and not a lender.† This means we don't provide credit, but we can help you find and compare different offers all in one place.