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  1. HSBC UK 
  2. Loans 
  3. What is a loan?

What is a loan?

A loan allows you to borrow a sum of money, which you pay back in instalments – usually with interest – within a set timeframe.

A loan can help you cover the cost of a large expense. The amount you’ll be able to borrow and the interest rate on offer will depend on a few things, like your credit score and how long you’ll take to repay it. 

Here, we look at:

Reasons to get a loan

What are the different types of loans?

Is a loan or credit card better?

Things to consider before taking out a loan

How to apply for a loan

What happens if you can’t repay a loan?

Can you pay off your loan early?

Reasons to get a loan

There are lots of reasons people take out loans. For example:

  • Buying a car
  • Paying for a wedding
  • Home improvements, like extensions or loft conversions
  • Other potentially large purchases, like holidays
  • Debt consolidation, where you merge existing debts into a single loan

What are the different types of loans?

When researching borrowing options, you may see products described as either secured or unsecured.

A personal loan is the most common type of unsecured loan, which you can use to cover the needs above. Unsecured loans tend to be for smaller amounts, whereas secured loans tend to be larger and require an asset for security, such as a house. For example, a mortgage is a secured loan because the lender can sell the property if you fail to meet the repayments.

Other types of loans include credit union loans, payday loans and peer-to-peer loans.

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Is a loan or credit card better?

Depending on what you need the money for and how much you want to borrow, you may want to compare loans and credit cards. 

Both work in a similar way – you borrow money and pay it back. But there are pros and cons to each, so weigh up which might be right for you.

Credit cards can be better if you need to borrow small amounts on a regular basis. They’re handy if you’re unsure how much you need to borrow, or just want to have extra funds available in case of an emergency. 

Loans tend to be more suitable for borrowing a larger amount of money, over a longer period. You may be able to get a better interest rate with a loan and you’ll have a set repayment term. 

Whether you choose a credit card or loan, you need to be able to repay the money you borrow. You may have to pay a fee if you miss a repayment and your interest owed can start to build up. This can also harm your credit score and your ability to borrow in the future. 

Explore: Ways to borrow

Things to consider before taking out a loan

Check the interest rates available to find the best one for you

The interest is often expressed as an Annual Percentage Rate (APR). 

When searching for a loan, you may see the ‘representative APR’. It isn’t necessarily the APR you’ll receive – it’s just an example – to help you compare the potential cost of the different loan products you may be eligible for.

The APR you’ll get is based on your circumstances – it may differ from the representative APR advertised. Always read the terms and conditions of any products you’re offered.

Make sure you can afford the repayments

Creating a budget can help you see if you can afford the repayments. If you’re unable to make the repayments, you may want to consider other options like borrowing less or saving up instead. By delaying a purchase, you may be able to save up the full amount you need, or a good proportion of it, so you’ll need to borrow less.

Check and improve your credit score

Before a bank or financial lender offers you a loan, they’ll most likely check your credit score. It shows them how reliable you are at borrowing and repaying money.  

It’s a good idea to check your credit report and improve your credit score before you apply for finance. Your credit score can affect the outcome of your loan application and whether it's approved. 

A better credit score can lead to more favourable interest rates and a wider range of loan products available to you.

Avoid applying for multiple loans

Lenders will do a hard credit check, which leaves a footprint on your credit file. Numerous credit searches in a short timeframe may signal to a lender that you’re struggling to manage your money. This could impact your credit score and your eligibility for a loan.

How to apply for a loan

Applying for a loan should be done carefully. You need to find the right loan for your circumstances and have all the correct documentation, which may include:

  • Your personal information
  • Your bank details
  • Your employment details
  • Proof of address and previous addresses

Check with the lender to see if you need to provide anything else, such as a P60 or any other official documentation. It can help the application move quicker if you’re prepared.

If you’re applying for a loan with your existing bank, the process may be much simpler as they’ll already have a lot of your information on record. You may be able to do this relatively quickly online or through an app, which is why it’s so important to think through everything before applying.

Once you’ve completed your loan application, check it thoroughly before you submit it.

Explore: What to check before applying for a loan

What happens if you can’t repay a loan?

Keeping up to date with your repayments helps you manage your money and avoid fees. When applying for a loan, check you can afford the repayments by including them in your budget.

You may want to set up a Direct Debit so the payments are taken from your account automatically. Check your balance regularly to make sure you have enough money in your account to cover them. 

If you can't make a repayment, speak with your lender as soon as possible. They may be able to help find a solution. Falling behind on debt repayments can put you in arrears (where you owe money that should have already been paid), which can be tough to get out of. It can also negatively impact your credit score.

Can you pay off your loan early?

If you can afford to, you may want to look at making overpayments on your loan. It’s not essential to do this, but it can help you pay your loan back more quickly and save you interest.

There may be a fee for making an overpayment, so check with your lender before you do. 

Explore: How to manage your loan repayments

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What is a personal loan? 

What is a joint loan? 

What is debt consolidation? 

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