What You Need To Know About Loans, Credit & Borrowing Money

The complete lowdown on loans, credit and borrowing money.

If money talk tends to go straight over your head, you're not alone. According to The London Institute of Banking & Finance, 82% of young people want to learn more about money and finance in school.

As a student or recent graduate, money can be a tricky subject. Between student loans, employment and the rise in cost of living, money is the subject that has many of us worried, or confused. Borrowing money, loans, and credit — what's the difference? We're here to give you everything you need to know.

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How does a loan work?

Firstly, what is a loan? A loan is borrowing a sum of money with the intention of paying it back, normally in instalments over a set period of time. Interest is usually added on top of repayments.

There are many different types of loan, but they tend to work similarly. Typically, you would apply directly to a loan or credit lender. It involves submitting an application and ensuring you meet the lenders' requirements and criteria to be eligible for the loan you're requesting.

If your application is approved and you agree on the rules (like interest rate, payment schedules, duration) then the lender transfers the money to your account, ready for you to use. Then you pay the loan back, usually in monthly instalments until everything you borrowed is paid off.

However, any missed payments will mean you'll be charged interest — unless you have a 0% interest rate loan.

Types of loans

There are several types of loans you may need during your life.

These may include:

• Secured loans

• Unsecured loans (which are also known as personal loans)

• Joint loans

• Credit union loans

• Payday loans

• Student loans

• Peer-to-peer loans

The more common types are secured, unsecured, student and payday loans.

What is a personal (unsecured) loan?

Personal loans and unsecured loans are the same. These loans are normally for smaller amounts of money and aren't tied to an asset like your home.

These can be used for things like funding a wedding, buying a car, home renovations and improvements, medical bills, or even to consolidate any existing debts. As with most loans, you'll still have to agree on set repayments over a duration of time. You'll also have interest to pay if you miss a repayment, but personal loans tend to offer lower interest rates than credit cards.

What is a secured loan?

Secured loans are usually for larger amounts of money, and require assets to be tied down. Assets are used as security in case you're unable to make repayments. After several failed repayments, your assets may be repossessed to pay off the loan, meaning you'll lose whatever you signed up as collateral and security.

Asset options include:

• Cars

• Property

• Stocks or bonds

• Collectibles

• Antiques

Some secured loans may offer you lower interest rates because of the secured asset. You have to think carefully about what you use as security, as you risk losing it if you don't keep up with repayments of your loan.

What is a payday loan?

Payday loans are short-term loans, usually of smaller amounts of money. They are designed to help tide people over until their next pay day — making it a great option if you've had some unexpected costs to pay one month (like car repairs).

Payday loans are available online and from high street shops, but while they are easier to get than other loans, the interest rates can be quite high. These loans may also want quicker repayments and offer only a short duration of time to pay back.

Read our article on how credit cards work to see if that could be an option for you.

Student loans

If you're a student, you're likely to know what student loans are and are currently involved in one or more (especially if you're doing a master's degree or have several degrees). It means you're borrowing money to help pay for your tuition fees and to help with living costs (maintenance loan).

You typically apply for student loans before you start your course. You'll have to repay these loans once you earn over a certain amount, but only after you have finished your degree/course. You are also charged interest from the day you take out the loan.

For further information on student loans, head over to gov.uk.

Debt consolidation loans

Debt consolidation loans are exactly what it says on the tin. It's a loan that helps you consolidate any existing debt into one loan.

Instead of paying back several different loan companies, you'll only have to pay back one company — the lender who consolidates your existing debt. You'll still be repaying back the amount you borrowed and are in debt by, but instead of managing payments between a few different lenders, you only need to make repayments to one company.

You'll have to be eligible for this loan, and it will likely involve you making large repayments over a longer period of time to cover your debt.

Car finance loans

Car finance loans let you borrow the money you need to buy a car. There are various options, but it will involve borrowing money from a lender and repaying it back with regular instalments. You'll usually need to pay an initial deposit for the car, too.

Then, by the end of the loan contract, the car will either be yours (as you've purchased the car outright) or you'll have to return it to the dealership for a new finance deal, or have the option to buy the car and pay the remaining cost.

For the different types of car finance options, check out moneysupermarket.com.

What is a loan guarantor?

Guarantor loans are opportunities to take out a loan with the help of a guarantor. These loans are worth considering if you're struggling to get a loan yourself. A friend or family member signs the loan contract to say they'll cover any repayments you miss or are unable to pay.

A guarantor loan is great for when you're starting out and don't have your own credit history. It's also a good way to maintain the chance to build a good credit score, as your guarantor has to pay if you can't, which won't affect your credit score.

Not sure about credit scores? Read our guide to what a credit score is and how you improve it.

How long can a debt be chased in the UK?

For most debts, your creditor has a time limit, sometimes called the limitation period. Many debts have a time limit of six years since you last wrote to them or made a repayment.

During this time, your creditor has to take action. This could involve sending you court papers and telling you that they'll be taking you to court. If the time limit has passed, your debt may be 'statute barred', meaning you don't have to pay your debt. The debt is essentially written off after six years, even if you haven't made any payments in that time.

For more information and advice on debt payments, head over to Citizens Advice.

What is a CCJ?

A CCJ is a County Court Judgement. This is where someone takes court action against you if you owe them money and you don't respond or repay. It's a legal step taken by your creditor or lender as a part of their debt collection process.

The court will decide whether there is a debt to pay and a CCJ will outline how the debt should be paid. If you receive a CCJ, it will be recorded on a public register and it will be passed onto any credit reference agencies, so if you try to make another loan, they'll see the information from the CCJ.

How long do CCJs stay on file?

A county court judgement will stay on your credit report for six years, regardless of whether you pay it off in that time or not. It won't appear on your records after six years have passed, even if you still haven't paid it all off.

Later, if you try to apply for another loan during that time, it will be more difficult as lenders will see you have a CCJ against you.

Can the claimant remove a CCJ?

If you believe you do not owe the debt, you are able to ask the court to reopen the case against you. This is called 'setting aside' your CCJ. You're only able to do this if you can prove you have a legal reason for not owing the money to the lender or creditor.

Afterwards, if the court agrees that you do not owe the money, then the CCJ will be removed from the register and your credit report.

What is a debt management plan?

A debt management plan is an option for you if you're struggling to make your loan repayments. These debt management plans are an informal agreement between you and your creditors. It mostly focuses on non-priority debts like credit cards, loans or store cards.

You'll usually have to pay the debt by one set monthly payment which will be divided between your creditors for you. These plans are managed by a provider who deals with your creditors, removing some of the stress for you involved in dealing with them.

How do I know if my debt is statute barred?

If you're wondering whether your debt is statute barred (written off), you can first check by seeing when the last payment date was and the default notice date. If it's been six years since the notice, then your debt is likely to be statute barred.

When your debt has become statute barred, the creditor cannot restart the debt. It will be written off completely after six years.

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