Bank Loans Explained – What They Are and How to Get One

If you need cash for a car, a home upgrade, or to clear debt, a bank loan is often the first option that pops up. But before you sign, you should know how bank loans work, what they actually cost, and what banks look for in your application.

Bank loans are straight‑forward: you borrow a set amount, agree on an interest rate, and repay over a fixed period. Unlike credit cards, the interest is usually lower, but the approval process can be stricter. We'll break down the key points you need to decide if a bank loan is right for you.

How Bank Loans Are Structured

When you apply, the bank checks three things: your credit score, your income, and your debt‑to‑income (DTI) ratio. A higher credit score (typically 650+) and a low DTI (under 40%) give you a better chance of approval and a lower rate.

The loan amount you get depends on what you need and what you can afford to repay. For example, a $5,000 personal loan might cost around £120‑£150 a month if the rate is 6% over three years. A £60,000 home equity loan will have a different rate, often linked to the mortgage market, and the monthly payment could be £250‑£300 depending on the term.

Interest rates vary by loan type. A 30‑year mortgage rate in mid‑2025 hovers around 4.5%‑5%, while a short‑term personal loan might sit at 6%‑10%. Fixed‑rate loans keep the same payment throughout, whereas variable‑rate loans can change if the Bank of England moves rates.

Tips to Get the Best Bank Loan

1. Check your credit first. Pull your credit report and fix any errors. Even a small improvement can shave 0.5% off the rate.

2. Shop around. Don't settle for the first offer. Compare rates from at least three banks, including online lenders, to find the lowest APR.

3. Reduce your DTI. Pay down existing debt or boost your income before applying. A lower DTI shows banks you can handle the new payment.

4. Consider loan length. Shorter terms mean higher monthly payments but less interest overall. If you can afford it, a three‑year personal loan saves money compared to a five‑year loan.

5. Use a guarantor if needed. If your credit score is below 600, a guarantor with good credit can increase approval odds and lower the rate.

Remember, banks also look at the purpose of the loan. A mortgage or home‑equity loan often gets better terms than a general‑purpose personal loan because the property provides security.

Lastly, read the fine print. Some loans have early‑repayment fees or hidden admin charges. Knowing these upfront helps you avoid surprises later.

Whether you’re eyeing a small £5,000 loan or a larger home‑related loan, understanding the costs and preparation steps can save you time and money. Use the tips above, compare offers, and pick the loan that fits your budget and goals.