If you’re thinking about applying for a personal loan, it’s important to consider your options carefully before taking the plunge.
In this guide, we explain all you need to know about the application process, including what to watch out for, to help increase your chances of getting accepted.
What is a personal loan?
A personal loan allows you to borrow a fixed amount of money over a fixed term. You can typically borrow over a term of between one and five years, although in some cases, you may be able to borrow for seven years or longer.
You will usually be given the option of borrowing a sum of between £1,000 and £15,000, with some providers offering larger loan amounts of up to £25,000.
Personal loans are also known as unsecured loans as, unlike secured loans, you do not have to use an asset such as your home as collateral. This means they are lower risk as there is no danger of you losing your home if you cannot keep up with your repayments.
What can I use a personal loan for?
Personal loans can be a good choice if you want to:
- fund home improvements
- purchase a new car
- consolidate debts
- pay for a wedding
- pay for a holiday.
What should I consider before applying?
Before applying for a personal loan there are many factors you should consider. We’ve outlined the main points below:
1. Will you be eligible?
One of the biggest factors you need to consider is whether you will be eligible for a personal loan.
The most competitive loans will be reserved for those with good credit scores, so if yours is below par you may find it harder to get accepted for a personal loan or if you are accepted, you may have to pay a higher rate of interest.
Before applying for a personal loan, it can be worth using an eligibility checker which some lenders now offer. This will give you an indication of how likely you are to be accepted for a particular loan and it won’t affect your credit score.
This is because eligibility checkers run a ‘soft’ search on your credit file rather than a ‘hard’ search.
Too many hard searches on your credit file in a short space of time can be viewed negatively by lenders as they may see it as a sign you’re struggling to get accepted for credit.
2. How much do you need to borrow?
You should also think carefully about how much you need to borrow and how much you can realistically afford to pay back.
The most competitive interest rates are usually for loan amounts of £7,500 and above, while smaller sums of around £2,000 can be far more costly. This could tempt you to take out a larger loan than you need – or can afford. It pays to do the maths carefully and make sure you have a plan in place to repay your loan on time.
3. How long do you need to borrow for?
When doing your sums, you’ll also need to consider the repayment term. If you choose a longer repayment term, your monthly repayments will be lower. But this also means the interest rate may be higher and you will end up paying back more overall.
If you can afford to make higher monthly repayments to clear your debt within a shorter period of time, it will work out cheaper overall.
4. What is the APR?
The APR, or annual percentage rate, takes both the rate of interest you’ll pay and additional charges into account, so it’s important to make sure you know what it is.
However, bear in mind that the APR you see advertised won’t necessarily be the one you get. That’s because the advertised APR only has to be offered to 51% of successful applicants, while the remaining 49% may be offered a higher rate.
5. Are there any fees?
Before taking out your loan, you should also check whether there are any fees. Some personal loans come with arrangement fees, but there may also be late payment fees, as well as a fee for paying off your loan early.
6. Are there any cheaper options?
Finally, you should also consider whether a personal loan is definitely the best option for you.
You may find a 0% purchase credit card is more suitable if you are looking to make a one-off purchase such as a new car or to pay for a holiday, for example. Payments can be spread over several months interest-free, though bear in mind that once the 0% deal ends, interest will kick in.
Alternatively, a 0% balance transfer credit card may be a better option if you need to consolidate existing card debt – again you’ll be able to take advantage of interest-free payments for several months.
Just bear in mind there is usually a transfer fee to pay and if you haven’t cleared the balance before the 0% deal ends, you’ll start paying interest.
I’m ready to apply – what are my next steps?
If you’ve decided a personal loan is the right choice and you’re ready to apply, you’ll need to have the following information to hand:
- your name and date of birth
- your current address and address history over the past three years
- your bank details
- your employment details
- your salary or income
- other financial commitments such as your mortgage or other types of credit.
You will usually need to be at least 18 years old to be eligible for a personal loan, although some loans require you to be aged 21 or over. You will also need to be in employment and/or meet the minimum income requirements.
Some lenders may accept certain benefit payments as income, but you’ll need to check.
Your identification will be checked through your credit record and the electoral roll (so make sure you’re on the roll and it is up to date), and the lender will also use your credit record to determine whether it is happy to accept your application.
Can I get a personal loan if I am self-employed?
If you are self-employed you will usually need at least one full year of audited accounts before you can apply for a loan, although some lenders may ask for more.
What happens once I’ve applied for a loan?
If your application is accepted, you’ll be sent a loan agreement either by post or email. You’ll need to sign this and return it before your funds can be transferred to your bank account. This could be completed in a matter of hours, but usually takes a few days.
Once you’ve received your funds, your first payment will usually be due the following month unless you’ve taken a payment holiday.
This is when you agree with the lender to suspend payments for a period. It’s important to agree the holiday in advance and not simply to stop making payments, as this will affect your credit score.
You’ll need to make up the payments by extending the term or increasing your payments for the remainder of the existing term.
What happens if I change my mind?
If you change your mind after applying for a personal loan, you’ll have a 14-day cooling-off period from either the date the loan agreement was signed or when you received a copy of the agreement – whichever is later.
If you have already received the funds, you will have 30 days in which to repay the money. You can only be charged interest for the period you had the credit, so if you were charged any additional fees, these will be refunded.
What should I do if my application is declined?
If your loan application is turned down, you can ask the lender to tell you why. Although it may not be able to tell you the specific reason, it should be able to give you an indication, for example because you failed a credit check.
It’s then worth checking your credit report for further information and to make sure there are no mistakes. If you spot any errors, you will need to contact the relevant credit reference agency to ask for the mistake(s) to be corrected.
You will need to explain why it is incorrect and provide any appropriate supporting evidence. You can also add a Notice of Correction to explain a missed payment if this is the case.
Once you’ve taken these steps, it’s best not to apply for another loan for at least three months, ideally six. Each time you apply for a loan, or any other type of credit, it leaves a ‘footprint’ on your credit report and, as mentioned earlier, if you make several applications in a short amount of time, lenders can see this as a sign you’re struggling to get credit or desperate for money.
Either way, it will probably make them wary of lending to you.