What are the different types of loans?

Why do you want a loan?

If you’re trying to decide which type of loan works best for you, a good place to start is the reason you want to borrow money. Perhaps it’s to cover unexpected repairs to your car or to fund a new kitchen. Or maybe you want to bring together existing debts and pay them off with a single loan.

You should only ever borrow money that you can comfortably afford to pay back – otherwise you risk a debt spiral.

Let’s take a look at the main types of loans available.

1. Personal loans (unsecured)

You may be able to borrow up to £50,000 through a personal loan, though the precise amount will depend on your circumstances. You can normally borrow the money for between one and five years – this varies by lender.

You're charged a fixed rate of interest and your monthly repayments are usually a set amount for the duration of the loan.

Personal loans are often called unsecured loans because you don’t need to put up a valuable asset as security.

Pros and cons of personal loans

Advantages

• You can normally use the money for almost anything you like, but some lenders may have restrictions.

• You can choose how much you want to borrow and the time you'll take to pay it back, subject to meeting the lender’s criteria.

• You repay a fixed amount each month, which helps when you’re budgeting.

Disadvantages

• Higher interest rates compared to secured loans.

• You need a good credit score to get the best interest rates.

Could be used for: moderate expenses such as a wedding or car, unexpected expenses such as a broken boiler, or smaller home improvements.

2. Secured loans

A secured loan uses a valuable asset that you own, such as your home, as security for the loan. If you can’t keep up with the monthly repayments, that asset could be repossessed by the lender to recover the money you owe, so it’s vital you understand this risk.

If you meet the lender’s criteria, you can typically borrow more than on a personal loan, sometimes up to £100,000. You may also be able to pay it off over many years or even decades.

Headline interest rates are often lower than for a personal loan. But if you’re borrowing over a long period, you may pay more in interest overall because you’re being charged interest for a long time.

Pros and cons of secured loans

Advantages

• Because a secured loan is less of a risk to the lender, you might be able to borrow a larger amount – potentially up to £100,000.

• It might be easier to get a secured loan than a personal loan if you have a poor credit history.

• Interest rates tend to be lower than on personal loans.

• You can take the loan out over a longer term, which makes your monthly repayments cheaper.

Disadvantages

• You risk losing your asset (your home) if you don’t make the repayments.

• If you take the loan out over a longer period, you’ll pay more in interest overall.

Could be used for: expensive home renovations or debt consolidation.

3. Guarantor loans

This type of loan is guaranteed by someone who agrees to pay back the loan if you can’t. A guarantor is usually someone who has a good credit record – often a close family member or friend.

A guarantor loan is commonly an unsecured loan, but some banks also offer secured guarantor loans.

You can’t compare guarantor loans with Compare the Market.

Pros and cons of guarantor loans

Advantages

• Could be an option if you have a bad credit score or no credit history.

• If you make the minimum payments on time each month, a guarantor loan can help build your credit score.

Disadvantages

• The guarantor is legally responsible for the loan if you can’t make the payments.

• Interest rates are usually higher than a standard personal loan.

Could be used for: someone with bad credit or no credit history who wants to improve their chances of being accepted for a loan.

4. Debt consolidation loans

A debt consolidation loan lets you pay off multiple existing debts with a single loan, which you then pay back monthly.

Pros and cons of debt consolidation loans

Advantages

• Might have a lower interest rate than your existing credit card or loan debt.

• One payment made once a month is often easier to manage than multiple payments to different lenders.

Disadvantages

• If the debt consolidation loan has a longer term than your existing debt, you may pay interest for longer. This means your loan could end up costing you more overall, even if the rate's lower.

• You might have to pay fees to set up the loan and settle your existing debts. These could outweigh any potential savings you make by consolidating your debt.

Could be used for: people with multiple high-interest debts looking for a more manageable repayment structure.

• Find out more: what is debt consolidation?

5. Loans for bad credit

Bad credit loans are designed for people who have a poor credit score or no credit history at all. They typically have higher interest rates and more restrictions than other types of borrowing, such as a minimum loan term or a borrowing limit.

Like debt consolidation loans, you can essentially class many types of loans as a loan for bad credit, as long as you meet the lender’s criteria.

Pros and cons of loans for bad credit

Advantages

• If you repay your loan on time each month and show you’re a responsible borrower, your credit score should start to improve, assuming you manage other commitments well.

• While acceptance isn’t guaranteed, you’re more likely to be accepted for a bad credit loan than a standard loan if you have a poor credit.

Disadvantages

• They typically come with higher interest rates.

• Any missed payments could further damage your credit score and put you into more debt.

• Fewer lenders offer this type of loan.

Could be used for: people with limited borrowing options due to a low credit score, but who can manage repayments responsibly.

6. Bridging loans

A bridging loan is a short-term loan used to ‘bridge the gap’ when you want to buy something but are waiting for funds from the sale of something else. A common example is when you want to buy a new property but are waiting for the sale of an existing property to complete.

With bridging loans you often borrow for a relatively short time, such as weeks or months.

Pros and cons of bridging loans

Advantages

• Helpful in property transactions, allowing buyers to act quickly in competitive markets.

Disadvantages

• Higher interest rates than standard long-term loans.

• May involve extra costs, such as arrangement fees, valuation fees, legal fees and exit fees.

• Designed for short periods, so borrowers must be ready to quickly pay back the loan.

Could be used for: property purchases when funds from a sale are delayed.

7. Car finance loans

Car finance covers multiple ways to borrow money to pay for a new or used car. Options include personal contract purchase (PCP), hire purchase (HP), a personal car loan or leasing.

Read more on how car finance works.

8. Payday loans (very risky)

These are short-term loans for relatively small amounts, from around £50 to £1,500, though some lenders offer up to £5,000.

Payday loans come with very high rates of interest so should be treated with extreme caution. If you’re struggling financially, it’s wise to seek debt help before applying for one.

You can’t compare payday loans with Compare the Market.

Pros and cons of payday loans

Advantages

• Quick access to cash with minimal eligibility requirements (but many also class this as a disadvantage, given the risk of them making debt problems worse).

Disadvantages

• You could get trapped in a spiral of debt if you can’t pay back the loan.

• Interest rates on payday loans are often as high as 1,500% APR (though fees for late payment are capped by the Financial Conduct Authority at £15 plus interest).

Could be used for: unplanned expenses, but always explore other options first.

If you’re worried about debt, MoneyHelper can direct you towards free debt advice.

Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.