UK Credit Guide: Lenders
When looking to take out a financial product, it can be overwhelming trying to navigate through the sheer volume of different lenders. It could be helpful to take independent financial advice before taking out any form of credit, but to help make sense of it, we’ve outlined the different forms of lenders below.
Banks & Building Societies
By far the most common type of lender and the place most turn to first when looking for credit. Banks offer a variety of lines of credit from overdrafts, personal loans, credit cards and mortgages. As a person’s own bank will already hold details of their financial history, it’s generally an easier process to apply for credit and they may even offer special discounts or rates. The interest rates that banks offer can vary hugely and will often be solely based on a person’s credit score, so those with a poorer credit history are likely to be offered higher rates, lower credit limits or even both.
This type of lender offers loans, similar to banks but may have different lending criteria. As their funding is usually their own, non-bank loans may need more protection. This means these loans could require collateral such as a vehicle or property, a guarantor, loan fees or higher interest rates than banks. The positive side of this is that with extra protection, they tend to have more relaxed eligibility criteria meaning they can be more accessible for those with a poorer credit history.
While less common than they used to be, payday lenders still exist for those who need them. Generally, this type of loan is for a small amount borrowed over a short period of time. Payday loans tend to carry quite high-interest rates and advertise fast pay-outs for those in need of quick cash.
Buy now pay later services
A newer form of the old fashioned catalogue credit (though that does still exist). This type of credit is often advertised for online purchases and gives the option for people to either delay the payment or spread the cost over a few months without any added interest.
A less common form of finance that is available only to members of the credit union. While historically, members needed to share a common bond such as profession or location, unions are now able to accept members from outside this bond, though they may still require certain criteria to be met. Unions are able to make their own rules when it comes to borrowing meaning new members may not be able to borrow from them until they have been with the union for a certain amount of time. The loans offered by credit unions have their interest rates capped at 42.6% APR.
Peer to peer lenders
This type of business matches borrowers who need loans with individuals who have capital they’re willing to lend out for a small return. The lending platform acts as a middleman, agreeing on the terms and rates for the transactions. The interest rates for these types of loans vary in a big way; often cheaper than banks for those with a good credit history but largely more expensive for those with a poorer credit history. The lending platform will often charge the borrower a fee which is used to cover the costs of their service.
Some businesses have the facility to offer cheap or interest-free loans to their employees. This is most common for those who need to cover the cost of their commute to work, though it can be used for other reasons too. The amounts and rates vary depending on the company but must be limited to £10,000 a year so they’re not classed as a ‘taxable benefit’. The repayments are usually taken directly from your salary so there’s less chance of late or missed payments.
Please note, none of these articles are intended to constitute financial advice and should be used for informational purposes only.