Types of loan

Most loans you can get in the UK fall into one of two groups: secured or unsecured. A secured loan is tied to an asset you own, usually your home, which the lender can repossess if you cannot keep up the payments¹. An unsecured loan is not linked to items of value like your home or car². Within those two groups sit the products people actually borrow through: personal loans, guarantor loans, credit union loans, payday loans and peer-to-peer loans.

The divide matters more than the names suggest. Unsecured loans are less risky for the borrower because you do not risk losing your home if you cannot make the repayments³. Secured loans often come with lower interest rates, because the lender's risk is reduced, but the trade-off is that your home or business could be at risk if the payments are missed⁴. How a loan is classified also changes what happens if things go wrong: debts secured on your home are treated as priority debts when money is tight, because the consequences of not paying them are more serious⁶.

This page explains each main type of loan, what it tends to be used for, what it costs, who can get it, and what can go wrong. It covers the whole market from mainstream personal loans to high-cost short-term credit, and points to where free, independent help is available.

Secured or unsecured: the main divide between loans

Every loan is either secured or unsecured, and the difference sits in what the lender can take if you do not pay. A secured loan means you borrow against an asset, such as a house¹. The most common form of secured lending is a mortgage¹². Unsecured loans are not linked to items of value, and are normally called personal loans².

The practical difference shows up in three places: the interest rate, the risk, and what happens in a debt crisis.

• Interest rates. Secured loans may offer lower interest rates than other types of lending, because the lender's risk is reduced by the security⁴. Unsecured lenders charge more to cover the risk that they cannot recover the money.
• Risk to your home. Unsecured loans are less risky than secured loans because you do not risk losing your home if you cannot make the repayments³. With a secured loan, your home or business could be at risk if you cannot keep up the payments⁵.
• Priority if you fall behind. Debts are divided into priority and non-priority debts. Priority debts are the ones with the most serious consequences if they are not paid, and lending secured on your home falls into that group, because non-payment can lead to repossession⁶.

The scale of both kinds of lending is tracked by the Bank of England. Its statistics on lending to individuals break down lending secured on dwellings and consumer credit separately, and repayments of lending secured on dwellings are themselves broken down into regular repayments, repayments on redemption and other lump sums¹³. Consumer credit data is broken down by type of lender and product, including credit card lending, overdrafts and other loans¹⁴.

The comparison between the two is covered in more detail in secured or unsecured borrowing compared, and the wider costs of borrowing in how loan interest is calculated.

Personal loans: the standard fixed sum loan

A personal loan is the standard way most people borrow a fixed amount. Most personal loans are unsecured, which means the loan is not secured against your home⁷. You borrow an agreed sum, repay it over an agreed period in regular instalments, and the interest is usually fixed for the term.

The most common form is a fixed sum loan: a type of personal loan for an agreed amount of time, often used for big items like a new phone or a boiler¹⁵. Because the amount and term are agreed at the start, the repayments are predictable, which is why personal loans are often used for planned spending rather than emergencies.

Personal loans sit within a wider family of borrowing that Citizens Advice groups together as the main types of borrowing money, alongside credit cards, overdrafts and other forms of credit¹⁶. Independent Age lists personal loans, payday loans and short-term loans as examples of consumer credit debt¹⁷. The Bank of England's consumer credit statistics cover credit card lending, overdrafts and other loans as the main product categories¹⁴.

Several variations sit close to personal loans:

• Doorstep loans are a type of personal loan you get from people who visit your home, and may be in the form of cash or vouchers. They are a form of high-cost, short-term credit¹⁸.
• Same day loans are a type of short-term loan paid into your bank account the same day you apply¹⁹.
• Buy now pay later is a type of short-term loan used by many online shops¹⁵.
• Debt consolidation loans may be unsecured personal loans, or secured against your home if you are a homeowner²⁰.

How personal borrowing works in detail, including affordability checks and credit files, is covered in how personal loans work and loan affordability checks. If you are considering borrowing with a poor credit history, see getting a loan with a poor credit history.

Secured loans put your home or other assets at risk

A secured loan is a loan attached to your home or a property you own⁴. Secured loans are sometimes called second mortgages, because they sit behind your main mortgage on the same property¹². Many secured loans are offered as a way to consolidate debts, with interest rates lower than unsecured personal loans because the risk to the lender is reduced⁴.

The defining feature is the security itself. Secured loans ask you to use your property as collateral, which means the debt is tied to the property³. If you cannot keep up the payments, the lender can take action to repossess it. Your home or business could be at risk if you cannot keep up the payments on a secured loan⁵, and your home could be repossessed if you have used it as security and cannot keep up the payments on the agreement²¹.

Not all secured loans use a house. A logbook loan is a loan secured on your vehicle, normally a car, with the lender taking ownership of it until the loan is repaid²². The same principle applies: the debt is tied to the asset, and the asset can be taken if the payments stop.

The risk is not hypothetical, and it extends beyond the borrower. Independent guidance on secured loans is blunt about the consequences:

That risk is why secured debts are treated as priority debts when someone gets into difficulty⁶. It is also why the decision to secure a loan against your home deserves more care than the decision to take an unsecured one: the interest rate may be lower, but the downside is larger. Missing secured loan repayments and the risk to your home is covered in missing secured loan repayments and your home, and logbook loans in logbook loans.

Guarantor loans rely on someone else agreeing to pay

A guarantor loan is a loan where someone else guarantees the debt: they agree to pay back the loan if the borrower cannot⁸. The Financial Ombudsman Service describes the arrangement as one where some lenders will only provide a loan to borrowers if another person, for example a friend or relative, guarantees to make the payments if the borrower does not²⁴. The creditor agrees to lend the money based on the guarantor being able to repay the loan in full²⁵.

Guarantor loans are a type of consumer credit²⁵, and they are typically aimed at people who cannot get a standard unsecured loan on their own. They can be more expensive than some other types of credit, since they often have higher interest rates⁸.

Who the guarantor is, and what they take on, is set out in guidance from MoneyHelper and StepChange:

• The guarantor is usually a friend or family member²⁵.
• The guarantor must prove they can afford the repayments, based on their income, savings and any assets²⁵.
• The lender might ask for proof that they are working, proof of income, or for the guarantor to be a homeowner⁸.
• The guarantor needs a separate bank account to the borrower⁸.
• In Northern Ireland, guidance adds that a guarantor usually must not be financially connected to the borrower, such as a spouse or partner²⁶.
• The loan money may be paid into the guarantor's bank account first, who can then forward it to the borrower²⁵.

The guarantor's liability is the heart of the product. If the borrower fails to make payments, the guarantor is legally liable to pay back the loan for them⁸. Depending on the terms of the agreement, the guarantor may become liable to pay back everything that is owed, not just the missed payments²⁷. The person guaranteeing the loan is jointly responsible for dealing with the debt: one person has to pay if the other cannot²⁵.

The liability survives even serious debt problems for the borrower. If the borrower enters a formal arrangement such as bankruptcy, a debt relief order or an individual voluntary arrangement, the borrower's liability is included in that arrangement, but the guarantor is still fully liable and expected to maintain the original repayments²⁶. If the arrangement is informal, such as a debt management plan, the borrower remains liable and the loan company can continue to take action against them if the guarantor does not maintain the original repayments²⁶.

The FCA's rulebook gives guarantors their own standing in the arrears rules: a reference to a borrower includes an individual other than the borrower who has provided a guarantee or indemnity in relation to a regulated credit agreement, a consumer hire agreement or a P2P agreement where the borrower is an individual²⁸. In plain terms, the guarantor is treated as a customer in their own right when the loan goes into arrears.

The same guarantee principle exists in mortgages: a guarantor mortgage is one where a close relative, or an ex-partner, agrees to guarantee the mortgage payments if the borrower cannot, which means taking on responsibility for paying the whole mortgage if the borrower cannot²⁹. A parent or family member could also use their savings or property to guarantee the loan²⁹.

Guarantor loans are covered in more depth in guarantor loans and being a guarantor, including what a guarantor pays when the borrower misses payments and credit checks on a guarantor. If a debt has appeared that you never agreed to, StepChange has guidance on debts not in your name³⁰.

Credit union loans: membership comes first

Credit unions are not-for-profit community lenders providing affordable loans and savings¹⁰. A credit union provides loans, savings, bank accounts and other services to its members⁹, and all credit unions offer savings and loans³¹. They are run by members to benefit communities rather than to make a profit⁹.

Membership is the entry condition: you cannot borrow from a credit union without joining one. A credit union will not be required to open an account for a person who is unable to fulfil its membership criteria³². Membership usually depends on a common bond such as living or working in a particular area, or sharing an employer or association.

Once a member, what you can borrow depends on the credit union. All credit unions can lend small amounts of money for all purposes, and some can lend larger amounts over longer periods, for example to buy a car or for home improvements³¹. Some will lend to you as soon as you become a member, while others only lend after you have saved with them for a set period³¹. Affordability is checked against the money you have left after paying your bills³¹. Credit unions describe their loan products as suited to individual needs and at rates you can easily afford³³.

Credit unions are often suggested as an alternative to payday loans³⁴, and they may be more willing to help people on a low income, people with poor credit, or people who do not have a previous record of borrowing⁷. They are also listed among the alternatives to same day loans, alongside budgeting loans, bank overdrafts and salary advances¹⁹. Some credit unions offer current accounts, usually with no credit check or overdraft⁹.

There are limits to what a credit union can do. A credit union is not a bank and cannot offer overdrafts, mortgages, electronic banking services and payment methods or business loans in the same way as a bank³⁵.

Credit union borrowing is covered in full in credit union loans, including save-to-borrow and saver loans and whether credit unions charge fees on loans. To find a credit union near you, see credit unions: a complete guide.

Payday loans: short-term, high-cost borrowing

A payday or pay cheque loan is a short-term, high interest, unsecured loan¹¹. In Northern Ireland's official guidance it is described as a loan you get in return for your pay cheque or proof of your income³⁶. They are called payday loans because they are intended as short-term loans, meant to be paid back when you next receive your wages or benefits²⁷.

The defining feature is cost. Certain types of borrowing, such as overdrafts, revolving credit on your credit card and payday loans, charge higher interest¹. Payday loans sit within high-cost short-term credit, a category that also includes doorstep loans¹⁸. More broadly, the House of Commons Library notes that high-cost credit covers a wide range of financial products including bank overdrafts, loans, buy-now-pay-later and rent-to-own schemes³⁷.

Payday loans are among the most commonly used credit products, alongside credit cards and overdrafts². But because of the cost, they are treated with caution in independent guidance, and credit unions are regularly suggested as an alternative³⁴. The cost cap that limits what payday lenders can charge is explained in the payday lending cost cap explained, and cheaper options are set out in cheaper alternatives to a payday loan and payday lender or credit union loan.

Related products worth knowing apart:

• Doorstep loans, also called home credit, are collected at your door by an agent who visits your home¹⁸.
• Same day loans pay out on the day you apply, and carry the same cost concerns¹⁹.
• Buy now pay later is a type of short-term loan used by many online shops¹⁵.

If you already have payday loan debt, what to do if you can't repay a loan explains the options, and how to stop a continuous payment authority explains how to control repayments taken from your account.

Peer-to-peer loans

Peer-to-peer lending is the one type in this list with the least detail, and this section is kept short accordingly. What the sources establish is that P2P websites connect you with people or businesses who can lend you money, without going through traditional financial companies²⁸. For a borrower, that means the money comes from individual lenders or businesses rather than a bank or building society, and the agreement works as a loan between you and them.

A peer-to-peer loan is therefore an unsecured personal loan in its behaviour, matched against the same rules on arrears and guarantees. The distinctive part is who lends the money, and if a platform arranging such loans stops operating, lenders that have closed or stopped lending explains what happens to your loan.

Where a secured loan can cost you more than the debt

The most common pitch for a secured loan is debt consolidation: rolling several unsecured debts into one loan against your home. Many secured loans are offered exactly this way, with interest rates lower than unsecured personal loans because the risk to the lender is reduced⁴. The monthly payment can fall, and the rate can look cheaper.

But the comparison that matters is not the interest rate. It is what changes about the debts themselves. When unsecured debts are consolidated into a secured loan, the loan becomes a second mortgage on your home, and puts it at risk: your home can be repossessed if you cannot keep up the payments²⁷. Shelter Cymru makes the same point for homeowners considering consolidation: if your consolidation loan is a secured loan, you could be putting your home at risk of repossession if you later find you cannot pay²⁰.

The overall cost can also rise even as the rate falls. Spreading the same debt over a longer term, or adding fees, can mean paying more overall than under the original debts, and the debts that were previously unsecured become priority debts secured on your home⁶. For borrowers with poor credit, secured consolidation is sometimes the only consolidation option offered, which is worth treating with particular care²³.

The decision is covered properly in debt consolidation loans, consolidation loan or free debt advice and homeowner loan vs remortgaging.

Where to get free help

Free, independent help with borrowing and debt exists across the UK, and it is worth using before taking out any loan you are unsure about.

• Citizens Advice explains the main types of borrowing money and where to get help¹⁶.
• MoneyHelper, the government-backed money guidance body, explains guarantor loans and other credit products⁸.
• StepChange Debt Charity publishes guidance on each type of loan debt, from personal loans to guarantor loans and doorstep loans⁷.
• National Debtline and Business Debtline provide guides on borrowing, secured debt and consolidation¹².
• In Scotland, mygov.scot signposts benefits and support, including Budgeting Loans that can help pay for things like rent, items you need at home and some debts⁴⁰.
• In Northern Ireland, Advice NI covers payday, guarantor and doorstep loans²⁶, and the Consumer Council offers help on personal finances, budgeting and illegal lending⁴¹.
• Independent Age provides guidance on different types of debt for people in later life¹⁷.

If money is already tight, the order to act in is set out in guidance on priority and non-priority debts: deal first with the debts where non-payment has the most serious consequences, which includes anything secured on your home⁶. Free debt advice before borrowing, rather than after, is the cheapest option on any page about loans: debt: a complete guide sets out the full range of help and solutions.