If you need to borrow money, a personal loan is one option to consider. Personal loans can be used for a wide range of purposes, whether you’re looking to pay for important home improvements or consolidate your existing debt into one monthly payment.
But before you start applying, it’s important to understand how personal loans work and how to find the right deal for you.
What are personal loans and how do they work?
Personal loans let you borrow a lump sum of cash over a fixed term – typically one to seven years. Funds are then repaid in monthly instalments, with interest added.
Unlike credit cards, loan repayments are fixed so you’ll know exactly how much you need to budget for each month. You can usually borrow more with a personal loan than a credit card too. Typically, you’ll be able to borrow between £1,000 and £15,000, but some lenders offer loans of up to £25,000.
”ALWAYS CHECK YOU CAN AFFORD THE REPAYMENTS BEFORE TAKING OUT A LOAN
EMANFinancial Adviser, OnestopSave
What can I use a personal loan for?
You can use a personal loan for a whole host of reasons. Common ones including spreading the cost of home improvements, buying a new car, or paying for a wedding.
Debt consolidation is another popular reason for applying for a personal loan. You can use the funds to pay off a number of existing debts, whether that’s another loan, an overdraft, credit card balances or buy now, pay later (BNPL) debt.
Once you’ve paid off your existing debts with the loan, you then make one monthly repayment to one lender, rather than multiple payments to several lenders. This makes it much easier to manage and, if you’ve taken out a loan with a lower interest rate, you’ll save money and be able to clear your debts faster too.
What you need to know before applying for a personal loan
Before you apply for a personal loan, it’s worth being aware of the following:
You’ll need to pass a credit check
As with all credit products, you’ll need to pass a credit check before you can be accepted for a loan. Lenders will examine your credit record to see whether you’ve borrowed responsibly in the past or whether you have a history of missed payments.
The higher your credit score, the more likely you are to be accepted and the lower the interest rate you’ll secure. But even if you don’t have a perfect credit score, it’s still possible to get a loan. You just might have fewer lenders to choose from and you might have to pay a higher interest rate.
Using an eligibility checker will show you which loans you have the best chances of being accepted for without affecting your credit score.
The best rates are available on larger sums
Interest rates on personal loans vary depending on the size of the loan and the length of the term. Typically, the most competitive interest rates are on amounts of between £7,500 and £15,000, while smaller loans of around £2,000 can be more expensive.
Depending on your situation, it might work to your advantage to take out a slightly larger loan to secure a lower interest rate. If you want to borrow £7,000, for example, you might be better off applying for £7,500 to get a lower rate.
But this won’t work in all scenarios. If you only need to borrow £3,000, for instance, borrowing £7,500 instead could make your loan unaffordable and you could struggle to repay it. Always do the maths first and ensure you can meet the monthly repayments before you apply.
You might not get the interest rate advertised
The annual percentage rate (APR) takes into account the interest rate and any additional charges. But although it’s important to know what it is, be aware that many lenders advertise loans with a “representative APR”. This rate only has to be offered to 51% of successful applicants, while the remaining 49% (which could include you), will likely be offered a higher rate and pay more. You might not know what this rate is until after you’ve applied.
Longer loan terms reduce monthly repayments but cost you more
Applying for a personal loan with a longer term can help to lower your monthly repayments. However, a longer term also means you’ll pay more in interest overall.
If you can afford to make higher monthly repayments and pay your loan back faster, you’ll save money by choosing a shorter loan term. Use a loan repayment calculator to give you an idea of how your monthly repayments could change depending on the term of your loan.
How can I improve my chances of being accepted for a loan?
There are several steps you can take to help increase your chances of getting accepted. These include:
Check your credit file
Experian, TransUnion and Equifax. Check your credit report carefully for mistakes and get them corrected as soon as possible. You can do this by contacting the relevant credit reference agency. Even small mistakes such as an error in your address can impact your credit score.
Take steps to improve your credit score
This includes paying bills on time and checking you’re registered on the electoral roll. It’s also best to space out credit applications by at least three months, preferably six.
Shop around
It can be tempting to pop into your local bank branch to find out whether they would be happy to offer you a loan. But this won’t necessarily give you access to the best deals. Instead, it’s worth shopping around and using a comparison site to see what else is on offer. There are a number of online personal loan providers, such as Zopa and Novuna Personal Finance, that could offer you a more competitive loan rate. Be sure to investigate these options as well as the more traditional lenders.
Use an eligibility checker
When you apply for a loan in full, a hard credit check is carried out which leaves a mark on your credit report. This means any lender searching your credit report will be able to see you’ve applied for credit. Too many hard searches in a short period of time can affect your credit score and reduce your chances of getting accepted for credit in the future.
However, if you use an eligibility checker (which many loan providers now offer on their websites), a soft search will be carried out and this won’t be visible to lenders. Only you will be able to see soft searches on your credit report. Using an eligibility checker could help you to establish how likely you are to be accepted for a particular loan as well as the interest rate you might get. This prevents you from applying for loans you’re likely to be rejected for.
Think about a bad credit loan
Some specialist lenders will accept applications from those who have a bad credit history and are struggling to get a loan elsewhere. However, they typically charge higher rates of interest and you might not be able to borrow as much, so you should consider them carefully. Make sure you only borrow what you need and always repay your loan on time. By doing so, your credit score will start to improve and you might be able to borrow at better rates next time.
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