Personal loans: Myths and misconceptions

If you’re thinking about applying for a personal loan, start by sorting the finance facts from fiction.

Late repayments can cause you serious money problems. See our debt help guides.

A personal loan can be a helpful way to spread the cost of a major purchase. Unlike a secured loan or a remortgage, you won’t need to put up your home or other assets as collateral.

However, as with just about any financial product on the market, there’s a lot of conflicting information about personal loans online. It’s understandable if that makes you nervous about taking out a personal loan for the first time, but knowledge is power: the more you know about how borrowing works, the better equipped you’ll be to save money and make credit work for you. Let’s explode some myths.

Myth #1: I’d be better off with a credit card

This might be true or it might not. For one thing, personal loans are generally cheaper over the long term. It depends both on your circumstances and on how you’re planning to use the money.

A personal loan is likely to be better for you if you want the certainty of knowing how much you’ll repay and for how long; if you want to borrow one large sum of money, for a purchase or a debt consolidation; and/or if you’re worried that you might be tempted to overspend with a credit card. Having access to a revolving source of credit like a credit card isn’t ideal for everyone, particularly if you’ve had problems with overspending in the past.

On the other hand, a credit card might be better if you only need a smaller amount of money – say £5,000, rather than £25,000 – particularly if you can avoid paying interest. Yes, credit cards have a higher interest rate, but you’ll only pay interest when you have a balance that takes more than a month to pay off (which can still take less time than a personal loan). If you can repay in full each month or within the introductory 0% period if there is one, a credit card can work out cheaper than a loan, as well as giving you:

  • More flexibility around how much to repay when.
  • Potential perks: some credit cards come with rewards, cashback or discounts with specific retailers.
  • Section 75 payment protection on purchases.

Read more about how to choose between a credit card and a personal loan.

Myth #2: The rate you see is the rate you get

When you compare personal loans, you’ll see a “representative APR” (annual percentage rate) for each loan product. Remember that this isn’t necessarily the interest rate you’ll pay if you’re accepted for the loan, because:

  • The APR isn’t just the interest rate. It also takes into account any fees that all borrowers will have to pay: this means things like application fees, but not avoidable charges like missed payment fees.
  • “Representative” means “more than half our customers will pay this”. The representative APR is the APR that a lender realistically expects to offer to 51% of its customers. 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.
  • The interest rate you pay will almost certainly be tailored to you. Most lenders tailor interest rates to individual customers. 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. Interest rates can also vary according to the amount and duration of a loan.

Myth #3: I won’t be able to get a personal loan, because…

“I’ve got a bad credit score”

It’s true that the better your credit score, the more borrowing options you have, but it’s not necessarily true that you won’t be able to take out a loan at all. Just be sure to apply with caution so that you don’t damage your credit score any further: use an eligibility checker to check your chances of approval before you apply and don’t make too many applications within a short period of time.

Read our guide on personal loans for bad credit to get a better idea of your options. You’re very likely to pay a higher rate of interest with a low credit score than you would with a better score, which means it’s extra important to make sure you shop around.

“I have no credit history at all”

Lenders like to have evidence that you’re a reliable person to lend to, so it’s true that you’ll have fewer options if you can’t demonstrate a history of responsible borrowing. However, there are lenders prepared to lend to people with no credit history: everyone has to start somewhere, after all! Compare your options at the link above and/or in our guide to loans for young people.

“I don’t have a salary”

Obviously, you can only take out a loan if you have the means to repay it, but that doesn’t necessarily mean personal loans are only for those in salaried employment. Whether you’re self-employed or drawing a pension, there may be options out there for you. Just be sure to check your eligibility before you apply.

“I don’t have a good enough reason to take out a loan”

It’s important to be honest with lenders about the reason for needing a loan (otherwise that’s fraud). Obviously they won’t lend you money for, say, illegal activity, or a risky activity like gambling. But if you’re worried that personal loans are only for “good investments” like home renovations, don’t be: as long as you can afford to repay it, there’s nothing wrong with taking out a loan to pay for a new car, a holiday or a wedding.

Myth #4: Taking out a personal loan will damage your credit score

First of all, it’s true that any application for credit will be recorded in your credit history. That’s why it’s so important to check your eligibility before you apply, so that you don’t leave unnecessary marks on your credit report by making several applications.

However, this slight negative impact on your credit score is likely to disappear after a few months. Once you’ve been accepted for a loan, you can actually boost your score by making all your repayments in full and on time.

What’s more, if you’re taking out a loan to consolidate your existing debt, then you’ll hopefully be saving yourself from the potential credit score damage of the missed payments and defaults that can arise from having debt you can’t afford.

Bottom line

A personal loan may or may not be the best option for you, but hopefully you’re now better equipped to choose the right product, understand what to expect and protect your credit score.


What happens if you don’t pay back a personal loan?

If you miss a payment on your loan, the loan provider is likely to charge you a fee. If you miss further payments, it may issue you with a county court judgment (CCJ) or take further collections action which could ultimately result in you being made bankrupt. If you’re struggling to make repayments on a loan or other form of credit, read our guide to dealing with debt.

Is it harder to get a loan now in the UK?

As of January 2023, many lenders have been tightening their lending requirements over the last few months. If you are able to access credit you may find yourself paying higher interest rates than you might have done in the past.

Why do I keep getting turned down for personal loans?

This is likely because you have a poor credit history or no credit history at all. Unfortunately, making more applications for personal loans will only make this worse. You may want to check your credit score and then focus on building a positive credit history.

Late repayments can cause you serious money problems. See our debt help guides.
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