Personal loans: key changes you should know
Your credit score, disposable income and how much you want to borrow have always played a role in getting approved for a personal loan. However, recent changes have made things a bit more challenging.
High interest rates have affected the lending industry and increased borrowing costs. Additionally, due to increased risks, lenders are also tightening the reins to ensure they are lending responsibly. Some lenders have also raised borrowing amounts to meet rising costs.
All these factors will affect you if you plan to get a personal loan in the near future. We explain why and provide a few tips on personal loans.
- Why have personal loans become more expensive?
- Why are personal loans harder to get?
- Why are lenders lending higher amounts?
- Should I use comparison sites to find a personal loan?
- Top tips to consider before you borrow money
Why have personal loans become more expensive?
According to recent statistics, the cost of borrowing money has increased significantly. Statistics show that in 2021, interest rates on loans averaged 6.9%. However, this has risen to 10.6% in 2024, with some lenders doubling their interest rates within 18 months. There are several reasons lenders are charging more.
The BoE sets the base rate—the interest rate for lending to other banks. The BoE has raised interest rates due to inflation, from 0.1% in 2021 to 5% in August 2024. This influences the cost of borrowing, and the knock-on effect has meant banks and lenders have had to raise their rates for car loans, credit cards, and personal loans. However, it is not just the cost you need to consider. Personal loan applications are not easily approved.
Why are personal loans harder to get?
It’s not just the borrowing costs that make it harder to get a personal loan. Many people are struggling financially; this puts lenders at risk of being out of pocket. Most personal loans are unsecured, which means there's no collateral to back the loan and a higher risk for the lender. According to a recent BoE survey, lenders reported that the default rate (failed payments) for unsecured lending increased again in the second quarter of 2024.
As a result, lenders are likely to be very careful who they lend to and set checks to reduce risks. This includes affordability checks to ensure you have enough money to make monthly payments by looking at your income and expenses. Your credit score will also significantly influence whether money is lent to you and the interest rate you get.
If you have a poor credit score, there are many ways to improve your credit score, for example, by ensuring payments are made on time and getting on the electoral roll. It’s also a good idea to check your credit score and keep your details up to date.
Why are lenders lending higher amounts?
Recently, some lenders have increased the money you can borrow on a personal loan. In May 2024, Nationwide joined several major lenders by increasing loan amounts from £25,000 to £50,000. Other lenders offering £50,000 unsecured loans include Bank of Scotland, FirstDirect, Lloyds, NatWest, and Halifax. Nationwide explained the change was due to rising home renovation costs.
With these surprisingly high amounts available, borrowing a large amount of money may be tempting. However, no loan is guaranteed, and as already mentioned, approval will depend largely on your circumstances and the lenders’ checks.
Borrowing large amounts of money will mean you need longer to pay off the debt. And even though interest rates will be lower for larger amounts, the monthly interest costs will add up over a longer period.
Should I use comparison sites to find a personal loan?
Many websites, like MustCompare.co.uk, can be useful tools for comparing personal loans. They allow you to enter the amount you need and the repayment period. You can then filter results and compare rates, costs, and more. Additionally, comparison sites will have various options and lenders; this can save you time instead of manually searching for lenders online.
Although not the case with MustCompare, a downside is many require you to provide personal details before showing you lending options or results. You could also be disappointed when you try to apply for a loan you viewed. Comparison sites will show you what may be a good fit for you, but only once you apply directly with the lender will you know if you’ll be approved or not.
Although the comparison site will show numerous lenders, not all will be listed, meaning you may lose out on a better deal. If you use a comparison site, ensure the firm is authorised and regulated by the Financial Services Authority (FSA).
Top tips to consider before you borrow money
Borrowing money may be tempting and sound like a quick, simple way to pay bills and more. It will also mean you take on more debt, and it is worth asking yourself if you really need to borrow more. Here are a few tips worth considering:
- Only borrow what you need and try to pay it back as quickly as possible. Usually, you can overpay or settle your loan earlier with no additional charges.
- Before you proceed, make sure the loan repayments are realistic for your current and future circumstances. Lenders can only make decisions based on current information and will not be aware of future personal changes that you know of.
- Smaller loans (under £3,000) will have higher interest rates. These include short term loans.
- Don’t just compare APR, check the total you will pay back against what you plan on borrowing.
- Consider the alternatives, such as asking your employer for a pay advance if it’s not a big amount, asking a family member, or using an interest-free credit card.
In conclusion
Most types of credit are affected by the base rate, and high interest rates make borrowing money more costly. Although some lenders have increased loan amounts, applying has not gotten any easier. With many people struggling to make ends meet, lenders are likely more cautious and have strict lending criteria that may result in your application being rejected.
However, all these factors do not mean getting a personal loan now is a bad idea. It’s a case of weighing the negatives with the positives to make sure a personal loan is right for you. And finally, don’t forget these tips:
- Borrow only what you need
- Make sure payments are realistic
- Consider potential future changes
- Avoid high interest rates
- Compare the total you pay back, not just APR
- Consider cheaper alternatives