Understand Borrowing Before You Apply
A loan can help spread the cost of a large purchase, cover an unexpected expense or provide money for something you cannot pay for all at once.
However, borrowing also means committing to future repayments. Therefore, it is important to understand how much a loan will really cost before you apply.
At Energility, we want to make loans and borrowing easier to understand.
Please note: Our comparison service is not yet live. We are currently focused on building Energility and creating high-quality, useful content to help you make informed choices. Our compare and switch, loans provision and insurance services will launch in January 2027 and our mortgage advice service will launch in April 2027.
In the meantime, please feel free to explore the website and make full use of our free advice, guidance and resources to help you understand your options and make informed choices.
What Is a Loan?
A loan is money that you borrow and agree to repay.
Usually, you receive an agreed amount from a lender. You then repay it over a set period, normally through regular monthly payments.
In addition, you will usually pay interest.
For example, if you borrow £5,000, you may repay more than £5,000 in total because interest is added to the amount you borrowed.
Therefore, before choosing a loan, look beyond the amount available to borrow.
Instead, consider what you will have to repay overall.
How Do Loans Work?
When you apply for a loan, the lender will usually look at your circumstances before deciding whether to lend to you.
For example, it may consider your income, existing borrowing and credit history.
The lender may then decide:
- Whether to offer you a loan
- How much you can borrow
- The interest rate available to you
- How long you can borrow for
- How much you will repay each month
However, different lenders use different rules.
As a result, the loan and interest rate available to one person may be different from those offered to somebody else.
What Is APR?
When comparing loans, you will often see APR.
APR stands for Annual Percentage Rate.
It is designed to help show the cost of borrowing and includes the interest rate plus certain charges.
Therefore, APR can make it easier to compare loans on a more consistent basis.
However, the advertised or representative APR is not necessarily the rate that every applicant will receive.
Your actual rate may depend on your circumstances and the lender’s assessment.
So, always check the rate and terms you are actually offered before accepting a loan.
Look at the Total Amount Repayable
Monthly repayments are important because they need to fit your budget.
However, they do not tell you everything.
Imagine two loans for the same amount. One has a lower monthly payment but runs for much longer.
At first, the lower payment may look like the better option. Yet you could pay more interest because you are borrowing the money for longer.
Therefore, when comparing loans, look at:
How much you borrow
How much you pay each month
How long you will be paying
How much you repay altogether
The final figure can be particularly useful when comparing the overall cost.
Secured and Unsecured Loans
Loans can work in different ways.
Unsecured Loans
An unsecured personal loan is not normally secured directly against your home or another specific asset.
Instead, the lender decides whether to lend based on factors such as your finances and credit history.
You then repay the loan over an agreed period.
However, unsecured does not mean there are no consequences if you fail to repay.
Missed payments can affect your credit history. In addition, the lender may take action to recover the money you owe.
Secured Loans
A secured loan is linked to an asset, often your home.
Because the lender has security against the borrowing, secured loans may sometimes allow larger amounts or longer repayment periods.
However, this creates an important additional risk.
If borrowing is secured against your home and you cannot keep up with the repayments, your home could be at risk.
Therefore, secured borrowing needs particularly careful consideration.
How Much Should You Borrow?
A lender may be willing to offer you more money than you originally planned to borrow.
However, that does not mean borrowing the extra amount is necessarily a good idea.
Generally, borrowing more means repaying more.
So, start by considering how much you actually need.
For example, if you need £4,000 for a specific purpose, increasing the loan to £6,000 simply because the money is available could add unnecessary debt and interest.
Borrowing should ideally solve a financial need rather than create another one.
Choosing the Loan Term
The loan term is the length of time you have to repay the money.
A longer term will often reduce the monthly payment.
That can make the loan appear more affordable.
However, because you are borrowing for longer, you may pay more interest overall.
A shorter term usually means larger monthly payments. On the other hand, you may repay the debt sooner and reduce the total interest paid.
Therefore, the aim is to find a sensible balance between affordable monthly payments and the overall cost.
Can You Repay a Loan Early?
You may decide that you want to repay a loan sooner than planned.
For example, your income may increase or you may receive a lump sum.
Early repayment could reduce the amount of future interest you pay.
However, the rules can vary between loans.
Therefore, check the terms before making extra payments or settling the loan early. There may be charges or other conditions to consider.
Your Credit History
Your credit history can affect your ability to borrow.
Lenders may use information from your credit report alongside other details when considering an application.
For example, they may look at your existing borrowing and how you have managed credit in the past.
However, credit scores shown to consumers are not the only factor lenders use.
Each lender can have its own lending rules.
Therefore, being accepted by one lender does not mean another lender will make the same decision.
Be Careful With Multiple Applications
When searching for a loan, it can be tempting to apply to several lenders to see who accepts you.
However, some applications can leave a record on your credit file.
Therefore, it can be useful to check whether a provider offers an eligibility check or quotation search before making a full application.
Where available, this may help you understand your chances of being accepted without immediately making a full credit application.
Always check how a search will be recorded before proceeding.
When Could a Loan Be Useful?
People borrow money for many different reasons.
For example, a loan might be considered for:
- Home improvements
- Replacing a vehicle
- A large planned purchase
- An unexpected expense
- Combining certain existing debts
However, borrowing should not automatically be the first solution.
Before taking a loan, consider whether you could save for the expense instead or whether another option would cost less.
Most importantly, make sure the repayments fit comfortably within your budget.
Using a Loan to Consolidate Debt
Debt consolidation means using new borrowing to repay other debts.
This can sometimes make finances easier to manage because several payments become one.
In some circumstances, it may also reduce the interest being paid.
However, consolidation does not automatically save money.
For example, a lower monthly payment could simply mean that the debt is being repaid over a much longer period. As a result, the total amount paid could actually increase.
There can also be serious risks if unsecured debts are replaced with borrowing secured against your home.
Therefore, compare the total cost and risks, not simply the new monthly payment.
Before Applying for a Loan
Before borrowing, think about the effect the repayments will have on your finances.
Ask yourself:
- Do I really need to borrow?
- How much do I actually need?
- Can I comfortably afford the monthly payments?
- What APR am I being offered?
- How much will I repay altogether?
- How long will I be in debt?
- Are there any fees or charges?
- Can I repay early?
- Is the borrowing secured against anything?
- What would happen if my income fell or my costs increased?
If the repayments already look difficult before you borrow, taking the loan may make the situation harder rather than easier.
Loans and Energility
Loans will form part of Energility’s wider comparison service.
Our aim is to help people compare and understand important household and financial products across five main areas:
Energy · Utilities · Mortgages · Insurance · Loans
However, we are introducing these services gradually.
Therefore, loan comparison and loan services are not currently available through Energility.
We plan to introduce them over the next few months.
In the meantime, our free guides will continue to explain borrowing in simple language. As a result, you can build your knowledge before comparing products or making an application.
Information Is Not Financial Advice
Our loan content provides general information and education.
It does not recommend a particular lender, loan or course of action. In addition, it does not assess whether borrowing is suitable for your individual circumstances.
If you are struggling with existing debts or finding it difficult to make repayments, taking out more borrowing may not be the right solution.
Instead, consider seeking free, independent debt help before taking on additional credit.
Learn First. Compare Better.
At Energility, we believe borrowing should be understood before it is taken on.
A low monthly payment can look attractive. However, it does not necessarily mean a loan is cheap.
Similarly, a low advertised rate does not necessarily mean that is the rate you will receive.
So, look at the APR, monthly payment, loan term, fees, risks and total amount repayable.
Most importantly, make sure the borrowing works for your budget.
Then, when Energility introduces loan comparison, you will be better placed to understand the options you see.
Energility
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