Your guide to personal loans

• Is a personal loan right for me?
• When is a personal loan not a good idea?
• What should I consider before getting a loan?
• How much can I borrow with a personal loan?
• What are the basic requirements for a personal loan?
• What does APR mean?
• What does RAPR mean?
• Other tips on personal loans
• What about PPI and loans?
• How can I reduce the repayments on a loan?

Personal loans are also known as unsecured loans simply because they’re not backed by an asset, like your home. You’ll get the money you need upfront, which you’ll pay back over a fixed period (usually three to ten years), in regular instalments.

Typically you can borrow between £1,000 to £25,000. You’ll have to pay the full amount back, plus interest, which is effectively the lender’s ‘fee’ for providing the service.

Is a personal loan right for me?

Personal loans are suited to people looking to borrow a little more than they might ordinarily get from a credit card. Personal loans can be used for house renovations, make payment towards a car and other large purchases.

They’re also handy for anyone wishing to keep a close eye on their budgeting. That’s because you’ll know exactly how much the repayments are each month and can plan accordingly. Of course, if you come into a bit of extra cash there’s nothing to stop you paying back the personal loan earlier –  or making over-payments –  but read the terms and conditions of your agreement carefully beforehand to make sure you aren’t stung by fees for doing so.

Personal loan interest rates can also seem appealing. Larger balances will usually come with a lower interest rate than their credit card equivalent, and they’re typically fixed (although variable interest rates on personal loans do exist, so check the small print before signing).

When is a personal loan not a good idea?

If you’re only looking to borrow a small amount of money, the interest rates might not be as competitive as other forms of borrowing. What’s more, most banks won’t accept applications of less than £1,000, so you might have to ask for more than you actually need.

The duration of the loan can also be a downside. Even if you think you can repay the amount quickly, lenders will often lock you into a contract that’s at least 12 months. Normally, loans for shorter periods and smaller amounts are called short term loans, and these come with higher interest rates.

Another consideration is that personal loans aren't the answer to everything. Although it might be tempting to borrow for a house deposit, for example, your mortgage provider will ask how you’re funding the deposit, and cash from a personal loan may impact negatively on their decision. The same applies to using a personal loan to start a business. You may be better off looking at business loans. You may find our guide on business loans vs personal loans helpful for this topic.

Think twice before applying for a loan if you have bad credit or a low credit score. While you may see loans with no credit checks advertised, it's unlikely no checks are performed. Authorised direct lenders must perform checks to ensure a loan is affordable and repayments will not leave you worse off financially.

What should I consider before getting a loan?

Before pursuing a personal loan, it’s worth nailing down exactly why you need the money. As well as the exceptions we’ve just listed, a personal loan should never be used as a ‘plaster’ to cover up financial difficulties – if you’ve fallen behind in your rent, for example. If you are struggling financially seek help. There are many UK organisations that can offer impartial tips and advice on how best to tackle your cash worries and debt.

Similarly, although personal loans can be used to bunch existing debts into one monthly payment, always do the maths properly first. Consolidating like this, while it may be convenient, isn’t always cheaper as extending your debt could mean you end up paying more interest.

Some people opt for zero balance transfer credit card deals instead, which let you shift other cards' debts onto one special cheap rate. While many of these deals are short term and may involve rolling the debt on once the 0% interest period is up, you can still find providers offering longer-term deals, some even until all your debt has been cleared. But there is usually a fee based on the amount you are transferring.

How much can I borrow with a personal loan?

Personal loans in the UK usually range from £1,000 to £25,000 - although some lenders will go as high as £50,000. Before applying, it’s also important to know how much money you need and what you can afford to pay back each month.

Let’s say the cash is going towards your wedding – you should price up all the component parts first, from venue hire to the dream dress, to get a firm idea of the figure you’re after. Then it’s time to work out what that means on a month-to-month repayment basis.

Loan calculators can be a useful tool for this. Bear in mind that spreading repayments over a longer period, while giving you lower interest rates and monthly repayments may mean forking out more in interest over the full length of the loan.

What are the basic requirements for a personal loan?

To apply for a personal loan, you need to be a UK resident and over the age of 18. Most lenders will perform credit checks and affordability checks to ensure you can realistically pay back a loan, so you will need to be employed or have a form of income to borrow money.

As part of the affordability checks, personal loan lenders will be interested in knowing how much disposable income you have. While you might have an impressive salary coming in each month, rent or mortgage commitments, plus any other regular outgoings, will affect how big a loan you’re ultimately offered, if at all.

Staying on the subject of wages, self-employed applicants can boost their chances of success by having detailed accounts of their earnings to hand. Expect a few more questions, and possibly some delays, before a loan decision is given, but you shouldn't be disqualified simply for being your own boss.

What does APR mean?

APR stands for Annual Percentage Rate. It tells you how much it will cost to borrow money as a percentage. APR takes into account the interest you’ll be charged on the money you borrow, plus any additional fees you might need to pay. The figure is averaged out to give a yearly rate. It is a way to help borrowers directly compare different loans on a like-for-like basis.

What does RAPR mean?

When looking for a personal loan, you likely see a "representative Annual Percentage Rate" (RAPR) advertised, we’ve a word of warning. Representative APR includes the interest rate, plus any arrangement fee/other fees. However, this interest rate won’t necessarily be the one you get if your loan’s successful.

The clue’s in the name: it’s ‘representative’. Basically, this means only 51% of successful applicants have to get it, while the rest could well end up with a more expensive loan than they applied for. If you have a poor credit history, you’re more likely to be among that number.

We've put together a loan jargon buster where we explain these and other industry terms such as base rate, PCP (Personal Contract Purchase) and soft credit checks.

Other tips on personal loans

One of the mistakes when taking out a loan many make is applying for the first loan they find. Shop around! It’s obvious advice, but too many people still stick with the first-rate they’re offered by their bank or building society – and could end up paying more as a result. Using a comparison website like MustCompare can help you cherrypick from some of the best personal loan deals on the market.

Some comparison tables will also include peer-to-peer lenders, which might be worth investigating if you have a good credit rating. Peer-to-peer lending matches individuals who want to loan money with those who need to borrow it, in the process bypassing traditional financial organisations like banks. One advantage is that it’s possible to borrow much smaller amounts, and often at a much cheaper rate.

Whichever provider you’re tempted by, ask for a quote first. If they have to do a credit check for this, ask that it’s a ‘quotation search’ only, which won’t leave a mark on your credit record. Repeatedly applying for credit might suggest to lenders that you’re having problems getting it, and reduce the chance of your loan being approved.

Keep an eye on your credit report and check your credit score regularly for any errors before applying for credit. You should get any incorrect information corrected, including updating your address when you move home as soon as possible.

Remember, you have a 14-day cooling-off period from either the date the loan agreement is signed or when you receive a copy of the agreement (whichever is later). If you do decide to cancel, you have up to 30 days to repay the amount you borrowed. Be reassured that you can only be charged interest for the period you had the money – any additional fees have to be refunded by your loan provider.

Another point worth mentioning is that while the majority of personal loans are unsecured, homeowners can also use their property as backing when they need to borrow. However, secured loans, which can include car loans, can have serious consequences. Should you default on repayments, the loan lender could force you to sell your asset to pay off the debt. 

What about PPI and loans?

PPI has been in and out of the news for some time now, so you’re right to be wary if a lender offers you payment protection insurance on your personal loan. Although the idea is good (your repayments will be covered if you’re unable to work because of accident, injury or redundancy), it’s been mis-sold in the past and many of the policies haven’t been up to scratch. If you want to be covered, it’s definitely worth shopping around other PPI providers before accepting the offer from your loan lender.

If you can rely on the financial support of family or a partner, have enough savings or adequate sick pay, PPI might not be necessary. Meanwhile, if you’re self-employed or doing temporary work, some PPI policies may not even cover you.

How can I reduce the repayments on a loan?

Keep an eye out for other UK loan deals on the market. If you find one with a lower interest rate, for example, it might be worth paying off your existing loan in full by switching to the new one. Swapping to a shorter deal might also be worth thinking about. While this might see your monthly repayments increase, you could save in interest by paying the loan back quicker.

When working out any potential savings, however, bear in mind that many lenders have set-up charges (these will be included in the APR), so the new loan might not be quite the deal you were hoping for. And, of course, there may be early repayment charges of around 1 to 2 months' interest from your current lender. These fees (and how they are calculated) should be set out in your loan information and agreement, so read through it carefully before making any decision.

Another solution might be a low-interest or interest-free balance transfer credit card. These put money into your bank account, which can then be used to repay the personal loan. Again, however, there are fees for the privilege (both from the credit card provider, and possibly your original lender for paying off the debt early), so you’ll need to weigh up exactly how cost-effective it’s going to be. You’ll also need to be disciplined at repaying the credit card, and confident you can do so before the interest rate offer runs out. And bear in mind that successfully applying for one in the first place will usually depend on you having a good credit score.

Concluding

While a personal loan can help with making much needed purchases, they have to be paid back with interest. So it's worth taking time to carefully consider if a personal loan is right for you, know how much you really need to borrow and what can afford month each month before proceeding. Sometimes it is best to try to improve your credit score, as this may mean lenders give you a better offer, and you are more likely to be approved for a loan. And finally, don't just for the first option you see, spend time shopping around and compare loans.

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