Personal loans
Personal loans, or unsecured loans, can be a good way to borrow money for expensive purchases and home improvements.
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What are personal loans?
Personal loans are a way of borrowing a lump sum of money for your personal use.
You repay the debt through fixed monthly repayments with interest over a set period of time, often between one and seven years.
These are also known as unsecured personal loans because the loan isn’t tied to an asset, such as your car, or property. If you’re unable to repay the loan, the lender can't just take possession of your assets or property to recoup the money owed – they’d need to instruct a debt collection agency or start court proceedings first.
Paying back an unsecured loan is also often cheaper than borrowing the same amount of money using your bank overdraft facility. Overdrafts are better suited to short-term borrowing, such as until the next payday.
Before taking out an unsecured loan, it’s worth checking what rate you’d be offered on a credit card. If you can get a 0% card, you can spread the cost of your purchase interest-free. However, other credit cards may be more expensive. Shop around to see what’s on offer.
A personal loan can help spread the cost over a longer period of time than a credit card, making it more manageable to pay back.
Credit checks
What is a credit check?
When you apply for a loan, lenders will run a credit check. This is when lenders request your credit file from Credit Rating Agencies (CRAs) to assess your eligibility for a loan.
Your credit check will show a record of the open credit cards, loans and agreements you've taken out.
Your credit file includes information on how you’ve managed debt in the past. It records if you have missed any payments, how many times you’ve applied for credit and other details, such as any County Court Judgments.
How often should you check your credit?
You can check your credit score as often as you like, it won’t cause it to change. In fact, many experts recommend checking your records at least once a year. Remember, you need to check with all three major credit reference agencies – Equifax, Experian and TransUnion – as each one could have inconsistencies or errors.
If you're preparing to apply for a loan or a mortgage, you might find yourself regularly checking your credit score to see if anything has changed. In the run up to any application, you should check for errors, and see if there’s anything you can do to improve your rating.
Common errors include having the wrong address or a misspelt name. If you notice an error on your report, contact the credit reporting company as soon as you can for them to rectify the mistake.
A quick way to boost your score is to make sure you’re on the electoral roll, and that you don’t have any missed payments outstanding.
Is a personal loan right for me?
Personal loans pay out in fixed lump sums, which you can use according to your needs.
For example, to:
Book a family holiday,
Fund your dream wedding
Consolidate your debt
Buy a new car
Make home improvements - new bathroom or kitchen
Once a personal loan is approved, you can use the money for almost anything you want and the lender doesn’t need to approve any purchases or payments you make. However, most have rules saying you can’t use the money to buy a house. In fact, banks and building societies often reject mortgage applications if the deposit comes from a loan.
Using a personal loan for its intended and stated purpose is the safest thing to do for your long-term credit and financial health.
When taking out a personal loan think about the years of financial responsibility that comes with it. You might find it possible to save up the money instead.
How much can you borrow using a personal loan?
Typically, unsecured personal loans are for borrowing anywhere from £1,000 to £25,000. However, some providers may let you borrow more, depending on your financial circumstances.
When you apply for a loan, how much you are able to borrow will depend on your credit rating, which lenders will use to help them work out how likely you are to pay the loan back.
A good credit rating means you can borrow more, and will be offered the best personal loan rates. You can use our personal loan calculator to check the current rates.
How much will a personal loan cost me?
The cost to you of an unsecured personal loan is known as the APR, or annual percentage rate. This is the number you should look out for when using a loan calculator and loan comparisons to find the best personal loans that suit your needs. You can read more about how APR works here.
Included in the APR is the interest rate you will pay for taking out the personal loan, and any additional fees the lender will charge. These costs will be included in your monthly repayments when you start paying back the loan.
A higher APR means the personal loan is more expensive for you. When comparing loans, get the cheapest loans by choosing a low APR.
Some personal loans have variable interest rates, meaning they can cost you more or less month to month. If you're worried about being able to afford higher repayments, or want the certainty of a fixed repayment plan, you should avoid this type of loan.
Unsecured personal loan lenders will also consider other factors such as, your income, and how much other debt you have, to assess whether you are eligible for a loan.
How do I find the best personal loans?
Here are some things you need to consider when comparing loans:
Amount you want to borrow: If you can’t borrow the amount you need to cover your needs, it doesn’t matter how cheap a deal you get.
How long you need to repay: The length of the loan term you choose will affect what your monthly payments will be. It’s important to pick a term long enough to keep the monthly payments affordable. However, a longer term means you’ll pay more in interest overall, so you should go for the shortest term you can afford.
Interest rate: This is the cost of borrowing money. The interest rate you are offered will depend on your financial circumstances such as, your income, debt, and credit score.
Fees: Some lenders often charge extra fees such as, arrangement fees or early repayment fees. By running a personal loan comparison you can find lenders who may not charge these fees.
It's always a good idea to run a personal loan comparison and compare loans from as many lenders as you can. Remember that the cheapest personal loans may not always cover your needs.
Things to consider about a personal loan
What is a 'representative' APR?
When searching for unsecured personal loans on loan comparison websites you will often see the interest rate and fees number referred to as the ‘representative’ APR.
At least 51% of a lender’s successful applicants must be offered this rate or lower when taking out the personal loan being advertised.
Of course, you could end up with a higher rate than advertised, particularly if you have a poor credit rating. This is because the lender needs to take your personal circumstances into account before it decides exactly how much it will charge you for a loan.
This may seem confusing, but given successful applicants will be given different interest rates, giving the representative APR helps customers to compare multiple products at once before deciding to apply.
Can I get a personal loan with bad credit?
Although having bad credit limits your options, you may still be able to get a personal loan. You might want to consider:
Guarantor loans: These are loans in which you get a friend or family member to be a guarantor for your loan. If you’re unable to repay your loan, it will be the guarantor’s responsibility to do so. Being a guarantor is a serious financial undertaking, so you should not be asking a loved one to take on this responsibility unless you are confident you can repay the loan with no impact on them.
Bad credit loans: These are loans that let you borrow even if you have poor credit. These loans, however, tend to have much higher interest rates than standard unsecured loans.
You may also consider secured loans, which ties your loan to an asset such as a car or home. In the event that you’re unable to repay your loan, the bank or lender can repossess the asset to recoup the loan. It's never a good idea to borrow money if you don't think you will be able to repay it.
Remember, every loan application shows up on your credit file, and too many at once can have a negative impact. This is why it’s sensible to use a ‘soft credit check’ to check your eligibility for a loan. This way you can find out the kinds of loans you’re likely to be approved for without getting a mark on your credit file.
What are the risks with a personal loan?
It is very important to pay every monthly repayment of an unsecured personal loan. If you don't, you may be charged a fee and interest on any missed payments, and it could negatively affect your credit rating for years to come.
In the worst cases, non-repayment of an unsecured personal loan can mean you are issued with a county court judgement (CCJ) or have to declare yourself bankrupt which leads to a lifetime of financial problems.
You might be tempted to pay your loan back early if you can. However, lenders that offer unsecured personal loans make their money by charging customers a fixed interest rate over a set period. Early repayment means they lose out on interest.
That’s why many lenders have early repayment fees and charges. If you decide to repay your personal loan before the end of the agreed term you have to pay the penalties. Some lenders won't charge this, so read the fine print. Even with the early repayment charges, you may be better off paying back the loan more quickly.
What is a cooling-off period?
When you take out a personal loan, you have a 14-day cooling-off period to decide if you really want it. This only applies if you borrow less than £60,260. The 14 days start from the date the loan agreement is signed or when you receive a copy of the agreement, whichever is later.
If you cancel, you have up to 30 days to repay the money you have borrowed. You may only be charged interest for the time you had the loan in your account. But some lenders require all interest to be repaid if, for example, there are 28 days or less on a 12-month loan or 58 days or less on a longer loan term. Any money you’ve already spent will have to be repaid.
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Last updated: March 21, 2024