Whether you’re consolidating debt, paying for a wedding, or buying a house, there are different types of loans to help you financially. Here we’ll look at the various loan types available and help you understand the best approach for your needs.

What is a loan?

A loan is a fixed amount of money you borrow from a lender. When you take out a loan with a lender, you agree to both the length of the term and the interest rate. Both factors impact how much you pay back in total and the cost of your monthly repayments.

At Asda Money, we work with a carefully selected panel of trusted lenders that offer personal loans from £1,000 to £25,000 across one to seven years.

How do loans work?

With a loan, you borrow a set amount of money from a lender. This is called the principal amount. This could be £7,000, as a personal loan, for example. You then pay back the principal amount in instalments every month over a defined period, say five years – this is called the term of the loan.

Your monthly repayments cover both the principal amount and the interest on the loan.

Components of a loan

Loans are made up of the following:

• Principal: The original amount of money you borrow from a lender.
• Term: The length of the loan, and the amount of time you have to pay it back.
• Interest rate: The interest paid on the amount borrowed, as a percentage.
• Monthly repayments: How much you pay back each month. This is based on the principal amount, loan term, and interest rate.

Check out our helpful financial jargon buster if you aren’t sure about any loan terminology.

How do I apply for a loan?

Before applying for a loan, it’s helpful to see how much taking out a loan might cost you in the long run, which is why Asda Money offers a free personal loan calculator.

If no offers are available, then our free impartial Financial Support service can help you understand what alternative options are available to you.

Types of loans available

The following are different types of loans to be aware of:

Personal loans

A personal loan can cover a variety of personal expenses. For example, you may take out a personal loan to use as a:

• Car loan - this is where you borrow the money to pay for a car outright. You borrow the money from a lender and pay for the full amount of the car, meaning you own it from the outset. You’ll then pay the loan off in monthly repayments. You won’t have any mileage limits and you’re free to modify the car.

• Home improvement loan - Whether you want to redecorate, buy some new white goods, renovate, or get a new kitchen or bathroom, by taking out a personal loan for this, you’ll get the money upfront and must make the monthly repayments to pay it off each month.

• Wedding loan - With the average UK wedding costing more than £20,000[1] many people borrow money with a personal loan. It could help cover the cost of the dress, the cake, or any of the essentials for your big day.

• Holiday loan - Whether you’re planning the trip of a lifetime or a getaway with the family abroad, you can borrow through a personal loan to help pay for it. A holiday loan means you can jet off on holiday now and pay the money back in instalments.

Student loans

Student loans help you pay for further or higher education as well as other expenses while you’re studying. Often, it’s made up of a tuition fee loan – usually up to £9,250 a year in the UK² – and a maintenance loan to cover your living costs. The exact amount you can borrow depends on where you’re based when you’re studying, the length, and the type of course you’re on.

When it comes to paying back a student loan, you only do so once you start earning a certain amount. It’s then taken directly from your salary each month. You do pay interest on student loans.

Remember, that while a student loan helps you pay for your education, it does leave you with considerable debt which will need to be paid back when you start working.

Business loans

With a business loan, a lender lends money to a business rather than an individual. As lenders are loaning to companies as opposed to people, business loans can be much larger than personal loans. Business loans must be paid back in regular monthly instalments, just like personal loans.

Debt consolidation loans

A debt consolidation loan is a personal loan to pay off your existing debts and turn them into one easy-to-manage payment. By consolidating high-interest debts like credit cards into one loan, you’ll likely pay less in interest.

Just remember, by taking out a debt consolidation loan you may be extending the term of the debt and increasing the total amount you repay.

Guarantor loans

This is a type of personal loan, where a friend or family member agrees to take on the debt on your behalf if you can’t afford to pay it back. Often, they have higher interest rates than personal loans, and they can put a strain on your relationship if something happens and the guarantor has to cover the payments.

Mortgage loans

A mortgage loan is an agreement between you and a lender where you borrow the money to buy a property. In most cases, you’ll need to put a deposit down yourself – usually around 10-20% of the property price – and the lender lends you the rest.

A mortgage is an example of a secured loan as it is secured against the property you’re buying. If you default on your mortgage payments, the lender has the right to repossess the property. 

Home equity loan

A home equity loan is a type of secured loan where you can borrow against the equity you own in your home. What you can borrow is based on the difference between the current market value of your home and the balance on your mortgage.

As with a mortgage, you risk losing your home if you can’t keep up with the payments.

Loans for bad credit

Money problems in the past may have left you with a poor credit score. But you may still be able to get a loan with poor credit. Bad credit loans are usually offered by specialist lenders and often have high interest rates.

If you do borrow with bad credit, it can help boost your credit score in the long run if you stick to your monthly repayments.

Which type of loan has the lowest interest rate?

The interest rate you’re offered depends on a range of factors. Take the example of a personal loan, Lenders will look at your eligibility for the loan and your credit score. If you have a good credit history and good affordability to repay, they will likely view you as less of a risk and may offer you a lower interest rate. The opposite is true if you have a poor credit score.

The amount you borrow and the length of the loan are factors too. For example, if you borrow over a shorter term, say 12 months, you’ll likely be offered a higher interest rate. Borrowing over a longer period means you’ll likely get a lower interest rate from the lender.

How to get the best loan deals

When looking for the right loan for you, it’s crucial to compare what’s out there from a range of lenders.

At Asda Money, you can check your eligibility for a personal loan from across our lender panel. With one simple eligibility check, you can understand the potential loans available to you from a wide range of selected UK lenders. Plus, it only involves a soft search of your credit history and won’t show up on your credit file at this stage.

How Asda Money can help

At Asda Money, you can explore your loan options with Asda Money’s panel of trusted UK lenders, without it affecting your credit score.

To understand more about loans and your finances, we also offer free and impartial advice and support on all things money through our Financial Support. Whether you need help understanding terms with our jargon buster or you want to check your financial health, we’re here to help.

[1] https://bridebook.com/uk/article/how-much-does-a-wedding-cost-the-2024-uk-average

² Student finance for undergraduates: New full-time students - GOV.UK (www.gov.uk)