What’s the most suitable loan for your needs?

6 min | 02 May 2023

The Chase team

With so many different borrowing options out there, it can be tricky to know where to start. Taking a look at your money mindset, earning potential and lifestyle can help you understand what kinds of credit could be right for you.

Your line of work, how often you work and what stage you're at in life can influence your lifestyle and spending habits.

If you're new to credit, it could mean fewer lenders are willing to offer you credit products. If they do, it will likely be at a higher rate. That’s because lenders assess how risky you are as a customer based on your salary, your outgoings and financial track record – or lack of one.

If you've got a stable financial track record and salary history, you'll likely have more borrowing options to choose from should you need them, and at more competitive rates.

We explore how your lifestyle and the reasons for borrowing could determine your loan type.

Here are some common lending scenarios and options:

Overdrafts: How do they work and what are their benefits?

You have a costly emergency, which will likely make you overdrawn this month. This is where a bank overdraft could act as a buffer until your salary comes in to pay off that expense.

An overdraft could be used as a cushion for occasional borrowing in exceptional circumstances. There are often interest-free student overdrafts, but it's essential that you have a plan for repaying these before any interest is due.

An overdraft helps build up a credit history should you want to apply for a credit card in the future.

Things to consider:

  • Overdrafts can be good for emergencies because they can often be set up in a matter of hours online or over the phone with your bank. They will be based on your credit history, so you may not always get the amount you apply for
  • Be sure to keep an eye on when any interest-free period runs out, so you're not caught with a hefty charge
  • Why not add weekly alerts on your mobile calendar for when the period expires, so you can start paying it off a little each week or month

Credit cards: What should I consider before applying?

You want to make a short-term purchase, such as new tyres or a holiday. Depending on your financial status, you could use a credit card, but keep in mind the maximum amount you can spend, and the time limit you have to pay it off before interest kicks in. This could give you additional protection for purchases over £100, under Section 75 of the Consumer Credit Act.

Credit cards can help manage cash flow. They are generally suited for amounts of £5,000 or less. They often come with higher interest rates than personal loans as well as smaller credit limits.

People who have a longer history of credit worthiness, which comes with age, bank loyalty, and higher salaries, could be offered competitive or even zero-interest.

Recent graduates, parents or anyone who has taken on a lot of debt as their family grows may be offered less competitive interest rates. If you fall into one of these categories, you’re not alone, so keep in mind that over time, there are ways that you can build your credit rating to get better rates.

Things to consider:

  • Changing to a new card provider? Search for zero-interest deals
  • Try to pay back more than the minimum amount due. By paying it back quicker, you'll pay less interest

  • Applying for several different forms of credit in a short space of time can make lenders and credit agencies think you are over-dependent on credit because it leaves a footprint on your credit file
  • Save on interest payments by keeping tabs on your credit card’s APR (annual percentage rate) in times of inflation and when the Bank of England increases interest rates. This is when you might consider switching to a lower-cost card
  • Some providers won’t let you borrow more if you’ve used a large proportion of your credit limit and are only making the monthly minimum payment
  • Set up transaction alerts on your mobile banking to spot overspending
  • Keep up to date on card provider perks, such as retailer discounts or money off hotels and days out
  • If your credit card has a fixed fee for using it, make sure it's still good value and affordable. And always check if it incurs fees before you use it abroad or if it charges you fees to make a cash withdrawal

Personal loans: When should I consider one?

These types of loans could be considered if you want to spend money on something substantial, such as a car or home improvements. A personal loan might be the solution as it can have a higher loan amount and longer payment terms. Overall, they can be useful for larger amounts of borrowing over a longer period. Check first to see if it would work out cheaper to add a home improvement sum to your existing mortgage.

If you miss a payment you could face charges and see your credit rating affected, and if you miss mortgage payments your home could be repossessed.

Things to consider:

  • Understand how much you will pay over the lifetime of the loan, which will be determined by introductory loan rates, variable or fixed rates and the time-period of the loan
  • Can you afford monthly payments? How would you pay if you lost your job? Do you have a backup plan to pay for loan payments?
  • You want to put your best foot forward to get the best rate, so giving the lender the full financial picture can help you get the loan you can afford. Before you apply, it’s handy to have all your financial records at hand in files, such as proof of employment, salary, work or government benefits and bank and saving account statements (or accounting records if you are self-employed). Being organised could also speed up the application process

What type of borrowing is best for you?

To find the best deal for you, you'll need to factor in your financial history, expenses, aspirations and needs. Some people may presume if you take a joint loan (i.e. overdraft, personal loan or mortgage) with someone else you are only responsible for paying your half, but that is not the case. You are both responsible for paying what is due in full even if the other can’t pay. If your financial situation changes for any reason, don't ignore your loan, credit card or overdraft. Talk to your bank and see how they can help. If you’re struggling to make ends meet, you could consider contacting Citizens Advice (Opens in new window) or MoneyHelper (Opens in new window)for guidance.

The Hub is intended as a knowledge portal to provide information on a range of topics, including financial products and lifestyle management. These articles are not financial advice. Articles may reference products and services which Chase UK does not currently offer.

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