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What should I look for in a personal loan?

There are a few key features you’ll want to consider when comparing loans. To find the best deal, ask yourself these questions:

• Do I qualify for this loan? Don’t waste time researching a loan if you don’t meet the requirements. Each loan application will usually have a small negative impact on your credit score, so it’s always smart to check your eligibility before you hit “apply”. The simple form above can check your eligibility with a selection of lenders in one go, so that you don’t have to check with each lender in turn.
• Can I borrow the amount I need over the term that I need? Will you be able to take out the amount you need and can you afford to pay it back in a reasonable amount of time? If not, you might want to keep looking.
• Does it have a competitive interest rate? Most unsecured personal loans charge a fixed rate of interest, meaning your monthly repayments will stay the same throughout the loan. Remember that the advertised rate is not necessarily the rate that the lender will offer you. Lenders will look at factors like your credit score, income and expenditure when deciding what rate to offer you.
• What are the fees? Some lenders will charge an “arrangement” or “set-up” fee, although this is becoming rarer.
• Can I make overpayments or repay the loan early? Most lenders won’t penalise you for paying back some or all of the loan early, but that doesn’t necessarily mean that doing so will save you money in interest. In many cases, you will be charged one or even two months’ worth of interest to settle your loan early.
• How long will I have to pay it back? Aim for a loan term that gives you monthly repayments you can afford without being too long. Otherwise, you could wind up paying a lot in interest in the long run.

Video: Three tips for finding the cheapest personal loan

What is APR?

If you’re comparing any credit products, it won’t be long before you’ll come across the Annual Percentage Rate (APR). This figure is designed to provide an annual summary, taking into account both interest and any mandatory charges to be paid (for example an arrangement fee) over the duration of the loan. All lenders must calculate the APR of their products in the same way and must tell you the APR before you sign an agreement, so for consumers, it can be a handy tool for comparison.

However, bear in mind that lenders are only obliged to award this rate to 51% of those who take out the loan – the other 49% could pay more. That’s why it’s often referred to as the representative APR.

So for personal loans, the APR is relevant but doesn’t tell the whole story. For example, if it’s very low, it means you need a good credit score to get accepted in the first place; if your credit score is less than perfect, you’re likely to get a higher rate than the advertised one. A good eligibility checker should not only tell you how likely you are to be approved for the loan, but also give you an idea of the rate you may be offered.

How can I improve my chances of the loan being approved?

There is no way to guarantee you’re approved for a personal loan, but giving yourself the best chance at being approved starts with meeting the eligibility criteria set by the lender. To further your chances of being approved, keep the following in mind:

• Establish your borrowing capacity. What repayments can you afford? Lenders will use a variety of criteria to decide how much you’re eligible to borrow, but you need to know how much you can afford to repay. If you’ve done your sums and are sure you can afford a particular amount each month, chances are a lender will reach the same conclusion.
• Building a good banking history. Keep your accounts in good standing to build a positive relationship with your banks, even if you don’t plan on borrowing from them.
• Keep your credit rating in good standing. Make sure you keep track of all your payments, from credit cards to utility bills, because any arrears, debts or missed payments will affect your ability to access credit. Don’t make too many applications for credit, and only apply for products you’re confident you’ll be approved for. Multiple applications for credit in a short space of time can signal financial difficulties to a potential lender.
• Keep track of your saving goals. If you manage to contribute to your savings regularly, it shows lenders that you are likely to manage ongoing loan repayments.

What will I need in order to apply?

In order to lend responsibly, lenders will need to verify the following:

• That you’re who you say you are
• Where you live
• That you can afford the loan you’ve requested

When you apply for a personal loan online, most lenders can now electronically verify all of these through a credit reference agency (CRA) such as Experian. In this case, you may need to answer some questions that only you would know the answer to, but you won’t have the hassle of having to dig out any ID, bank statements etc. This process won’t affect your credit score (however, the full credit check that normally happens after you hit “apply” has a slight and usually short-lived negative effect).

If you apply in a branch, the old fashioned rules apply. You’ll need to prove your ID and address with separate, acceptable documents, and you may be asked to prove your income (generally through the last two months of payslips and/or bank statements, or if you’re self-employed, an HMRC document confirming your latest tax return calculation). However, the lender will still carry out a credit search and affordability check through a CRA.

The documents needed when applying for a personal loan

Finder’s top five tips for taking out a personal loan

1. Compare a range of lenders.
   It can be tempting just to take out a loan with your current bank, rather than shopping around. But more often than not, it pays to compare personal loans. And it’s easy! Use Finder’s personal loan comparison eligibility checker to estimate costs with multiple providers, without running a hard credit check.
2. Consider if a personal loan is definitely the right option for you.
   Personal loans can offer a highly-structured form of lending, which can be a real advantage. You know when you’ll have paid off the loan, and, if the rate is fixed, you know exactly what you’ll pay. However, there are situations when the flexibility of a credit card or an overdraft could make those more suitable options. Similarly, if you have a mortgage, then as a secured loan, it may have a lower rate of interest. However, there are some important questions to ask yourself. If you take out a credit card, will you just end up spending more, and only making the minimum monthly payments? And by remortgaging, could you end up borrowing more than you need for much longer than you need it?
3. Check the early-repayment terms.
   As well as offering peace of mind, by paying your loan off early, you can save money on interest. However, many lenders will charge a fee, for example one month’s interest, if you wish to repay your loan early – particularly if they’re offering a highly competitive rate. For the lender, it’s a way of guaranteeing a minimum income from the product. If you think that there’s a strong chance you’ll repay the loan early, then a product with no early-repayment fees could potentially be more suitable than a product with high early-repayment fees and a slightly better rate.
4. Look at the rate bands
   Many lenders offer better rates when you borrow larger sums, or when you borrow over longer periods. Sometimes, borrowing fractionally more can put you into the next rate band and save you a packet in interest.
5. Understand the risks and check the small print.
   You should only ever apply for a loan if you’re confident you’re eligible and you’re certain you can meet the repayment terms. If you’re worried about slipping into a habit of spending more than you have, then consider saving the money first before making that expenditure rather than borrowing the money.

What can I use a personal loan for?

A better question is what can’t you use a personal loan for? This type of financing can cover almost any large expense or even consolidate your debt. Lenders will normally ask you what you need the money for, during the application process. Here are some common reasons for taking out a personal loan, plus some situations when a personal loan isn’t suitable.

Frequently asked questions

• How much can I borrow with an unsecured personal loan?

  You can typically borrow between £1,000 and £25,000, subject to approval. Some lenders offer loans up to £50,000, but that’s normally only to existing customers, and again is subject to the lender’s assessment of your circumstances.

• Should I get a consolidation loan?

  Consolidation on its own is not a priority. If you’re in debt, your aim is to simply pay it off as quickly as possible at the lowest cost.

  Debt consolidation loans are often sold as making repayments “manageable” and while this is true, you still need to aim for the cheapest repayment package. A debt consolidation loan is not necessarily the best way to do that.

• I'm a non/new resident of the UK. Can I get a personal loan?

  Lenders look at your credit history in order to determine how much of a risk they would be taking in offering you a loan. If you’ve only recently arrived in the UK, then there will be less information for a potential lender to assess.

  Getting credit with little or no UK credit history can be tricky. What’s more, lenders may charge a higher rate of interest on any credit that they do offer you.

  As soon as you’ve found a place to live in the UK, you should get yourself on the electoral roll (visit your local council’s website to register) and start building a credit history. Opening a UK current account can be another step towards building a credit history – demonstrating that you can keep up direct debits and regular utility payments will help show that you are more likely to keep up repayments on a loan.

  Don’t just apply for loan after loan the moment you arrive in the UK. This could actually harm your chances of securing credit – multiple rejections could be seen by a potential lender as a sign of financial difficulties.

  If you’re struggling to get approved for a personal loan, then you may wish to consider a credit builder credit card. You can apply for a smaller amount of credit (typically £250-£1,000) and after as little as four months have your credit limit reviewed.

  The UK government also offers a Refugee Integration Loan to refugees who have been given humanitarian protection. Find out more at www.gov.uk/refugee-integration-loan

• I'm self-employed. Can I get a personal loan?

  If you’re self-employed and you require a personal loan, you may feel a bit let down by some new eligibility requirements that have been put in place since the financial crisis and the abolishment of “self-certification loans”. However, there are options available from both traditional and non-traditional lenders offering personal loans to self-employed individuals.

  The main challenge when applying for a personal loan when you are self-employed is proving your income and that it’s sustainable. You will likely face lots of questions, so to avoid delays it’s best to be prepared.

  It’s common for lenders to request financial statements and tax returns (HMRC SA302) for the last two years. Lenders will also want to see your bank statements showing the payments of income noted in your SA302 tax form.

  If you are contracting, it may be necessary to show proof that contracts have been renewed over a one to two year period. If you are just starting out, then you will need to be able to demonstrate how employable you are, for example your years of experience in an industry or your relevant qualifications.

  If you can’t provide the required evidence of income and sustainability, then you may have to consider a non-traditional lender, who may offer more options for you, but often this will come at the cost of a higher interest rate.

• I have bad credit. Can I get a personal loan?

  The good news is that there are now plenty of specialist lenders who have decided to focus on “non-standard” lending, such as loans for bad credit. The bad news is that these lenders tend to charge higher rates. If you have a friend or relative who would be willing to guarantee your loan (i.e. promising to step in and clear the loan if you fail to do so), then you could consider a guarantor loan.

• Will my credit score affect my personal loan interest rate?

  Most lenders offer different interest rates to different borrowers depending on how risky they are to lend to. This is what’s called “risk-based pricing”. All responsible lenders will run a full credit search before approving an application, but the vast majority of lenders now offer a “soft search” or “eligibility checker” facility. These allow borrowers to get a good idea of the likelihood that they would be approved for a loan, plus an estimate of the rate they would be offered, without their credit score being affected.