A personal loan can be a useful way to cover one-off purchases or consolidate your debts into one fixed and manageable monthly repayment.
But, before making a personal loan application, it’s helpful to know what information you’ll need, how your financial situation will impact the loan you are offered, and what effect it could have on your credit score.
What is a personal loan?
Typically, a loan provider will lend between £1,000 and £25,000 but existing customers with a good credit rating may be able to borrow more.
Loan repayment terms usually range from 12 months to five years, and in some cases, seven years.
Interest rates and monthly repayments are almost always fixed.
Personal loans are also known as unsecured loans, because the sum isn’t secured against the value of an asset, such as your property or car.
How does my credit score affect my application?
Loan providers usually offer the best interest rates to borrowers with the highest credit scores.
You can check your credit score and credit report online for free through a credit reporting agency such as Equifax, Experian or TransUnion.
If you find your credit score is low, you may want to improve before applying. Tips include registering on the electoral roll and paying down other debt.
Searches for credit applications are visible on your credit report. Multiple searches in quick succession (perhaps as a result of previously being turned down) are a red flag to lenders and could hamper your chances of getting credit in the future.
What are the benefits of using a comparison website?
Shopping around for a loan on a comparison website means you can compare deals on offer from a range of providers rather than, say, just going directly to your bank which is unlikely to offer the best deal.
Most comparison websites also offer an eligibility checker, allowing you to easily cross-reference what different lenders might offer for your circumstances without impacting your credit report.
What details do I need to apply for a loan?
When using an eligibility checker you will need to share the following information:
What you want the loan for (for example, home improvements, a wedding or an emergency)
How much you want to borrow
The term over which you want to pay the loan back
Bear in mind that the size of the loan will affect the representative annual percentage rate (APR), with loans of between £7,500 and £15,000 being the cheapest.
Smaller loans of say, under £3,000 can carry particularly high APRs. That’s why, especially for smaller borrowing, it makes sense to consider other options too, such as a 0% credit card or overdraft.
And, while a longer term will mean lower monthly repayments, you will probably pay more in interest overall. In short, it’s best to opt for the shortest loan term you can comfortably afford.
You will also need to enter a few details about yourself including your full name and address, annual income and regular outgoings, employment status, and any dependants.
This information is used to confirm your identity and financial stability, in order to determine what loans could be suitable.
How are the results ordered?
Once you have input these details and hit ‘search’, results are usually first listed in order of your eligibility, which will be expressed as a percentage. However, you can change the filter to order the list of loan results by other criteria, too.
When do I find out what APR I will be offered?
The soft search from the eligibility checker will display the key details of each of the loans on offer to you, including the APR – the interest on your monthly repayments.
The APR incorporates any fees charged on the loan, such as the arrangement fee. That said, extra fees on personal loans are rare.
The APR will be marked as either ‘guaranteed’, or ‘representative’. The latter means the lender only needs to offer it to 51% of successful applicants. The other 49% of applicants will likely end up paying more.
Will I always be accepted for the loan if the soft search says ‘yes’?
The soft search does not guarantee that you will be accepted for all the loans listed, but suggests that the provider has lent money to others with a similar profile.
Only if your eligibility is stated as 100%, and the APR is flagged as ‘guaranteed’ will you definitely be accepted for the loan with the rate shown.
When will I get the money?
Once you’ve chosen a loan based on the information presented, you will be directed to the lender’s website.
It will then run a credit check on you, known as a ‘hard search’, to ensure your eligibility for the loan. Unlike with a soft search, this hard search will be recorded on your credit score.
If successful, you will then need to sign and return a loan agreement, after which the cash will be paid directly into your bank account, often by the next working day.