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A personal loan is when you borrow a fixed amount from a lender and pay it back with interest over a set time period — usually in fixed monthly repayments.
Lenders consider factors like your income and credit score when deciding whether to offer you a loan and what interest rate to charge (learn more about APR).
The main advantage of a loan is you get cash upfront, but are still able to spread the cost of a big purchase over time.
There are a few key features you’ll want to consider when comparing loans. To find a better deal, ask yourself these questions:
It’s important to remember that every individual’s personal circumstances are different and lenders will assess each application based on these. To give some further guidance on which lender might be best for your circumstances, our Best Personal Loans guide highlights lenders that are favourable for a variety of different financial circumstances and credit ratings.
Wondering if you should just get a credit card? Potentially, yes. However, the answer depends on what you’re buying, how much you’re borrowing and your level of self-discipline!
Credit cards can be cheaper for borrowing sums under £5,000, providing you have the discipline to repay it. Unless you have a good credit score and high income, credit cards typically won’t give you more than £3,000 to £5,000. Above £5,000 and personal loans should be a cheaper option.
Personal loans come in a lump sum – you have a predetermined amount of time to pay them off. By contrast, credit cards are a revolving form of borrowing. You borrow what you need, when you need it (subject to a card’s monthly limit) and you have to make at least a minimum monthly payment. Credit card interest rates are generally variable, but cards often come with a promotional fixed-rate introductory period.
Using the wrong credit card could cost you more because credit cards tend to have higher rates than personal loans. However, a card with a promotional rate of 0% on purchases could be a smart option, if you can get approved with the credit limit that you need.
Finally consider any other fees (application, monthly or annual fees), any offers and the length of the application process before settling on a form of credit. Don’t forget that you’ll pay a charge each time you withdraw cash on a credit card.
The annual percentage rate (APR) provides an annual summary of the cost of a specific loan from a specific lender. It takes into account both interest and any fees that all borrowers will have to pay. If a loan doesn’t come with a product/arrangement/application fee, then usually the interest rate and the APR will be the same (fees that you might incur, like missed payment fees or early redemption fees, aren’t taken into account).
The vast majority of lenders tailor the rates they offer to each applicant. This is known as “risk-based pricing”. If your application for a loan is successful, a lender will make you a loan offer, detailing the actual APR that you’ll receive.
The representative APR is the APR that a lender realistically expects 51% of its customers to receive. The 51% of applicants with the highest credit scores tend to be offered the representative APR, while the other 49% are likely to be offered a higher rate.
For personal loans, the representative APR is relevant but doesn’t tell the whole story. For example, if it’s very low, it probably means you need an excellent credit score to get accepted in the first place; if your credit score is less than perfect, then if you get approved, you’re likely to be offered a higher rate than the advertised one. Interest rates can also vary according to the amount and duration of a loan.
So despite the fact that APRs and representative APRs are designed to help consumers, they can feel like a bit of a minefield. Thankfully, most lenders offer a “soft search” or “eligibility checker” facility that you can use before applying for a loan. These facilities generally won’t impact your credit score.
Better still, services like Finder can check your eligibility with multiple lenders in one go.
There is no way to guarantee you’re approved for a personal loan, but giving yourself a better chance at getting approved starts with meeting the eligibility criteria set by the lender. To further your chances of being approved, keep the following in mind:
In order to lend responsibly, lenders will need:
When you apply for a personal loan online, many lenders can verify your identity and financial information electronically through a credit reference agency (CRA) like Experian. Instead of having to produce identification documents or bank statements, you may be asked to answer some security questions that only you should know. This process typically does not impact your credit score, although the subsequent full credit check that usually takes place after you submit your application may cause a slight, short-term dip in your score.
If you choose to apply for a personal loan at a physical branch, you’ll be required to adhere to traditional guidelines. This means you’ll need to provide appropriate documents to establish your identity and address separately. You may also be asked to prove your income, typically with the last two months’ worth of payslips and/or bank statements, or, if you’re self-employed, a document from HMRC verifying your most recent tax return calculation. However, the lender will still conduct a credit check and affordability assessment using a CRA.
The documents needed to apply for a personal loan
Use our free eligibility checker to discover the loans that you are most likely to be accepted for, without hurting your credit score.
1. Tell us about yourself
Let us know how much you want to borrow, what you want the loan for and a little about yourself. Remember, this is not an application, so it will not affect your credit score.
2. We search the market for you
We search a large panel of lenders to find you the loans that you’re most likely to be accepted for.
3. See your eligibility before you apply
Sort your personalised results by your chance of approval and compare the best loan rates available to you.
As long as you bear in mind that it’s unlikely to check the whole market, but instead a subsection of lenders with whom it has an arrangement, then a broker can take the strain out of finding a competitive personal loan deal. Brokers find the most competitive rate available to you from their panel of lenders, taking into account your individual circumstances. Normally this service is free because the broker will earn a referral fee from the lender.
Some brokers and “matching services” can now run soft searches with a range of lenders in seconds, meaning that without any impact on your credit score you’ll be able to get realistic rate quotes for loans you’re likely to be approved for. This can be a smart way to avoid disappointment, protect your credit score and focus on lenders likely to approve you.
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:
There are, however, situations when a personal loan isn’t suitable. Here are a few examples:
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