How to find the best personal loan

Taking out a personal loan can be a financial lifeline, and you can use the money to pay for just about anything - from a new car, a wedding or even home improvements.

You choose how much you want to borrow and, if approved, you can have the money usually on the same day in your bank account.

Loans can be used to pay for big ticket items, like a holiday, or they can be used for short-term, emergency funding if you don’t have the cash, such as a broken fridge or a failed MOT.

But with so many loans to choose from, how do you find the best one for your needs? Here we look at everything you need to know on comparing and finding the best personal loan.

What do look for in a personal loan

You can take out a personal loan from lots of different places; banks, building societies and specialist lenders. Most providers allow you to take out loans online, or through an app, but you can also apply in person in a bank branch.

Here are a few key things to look out for when you’re looking for a loan:

• Monthly payment: every month you will make a repayment to your loan provider, over the term of your loan. This payment will include any interest applied to the loan and you must make these payments. If you miss a loan payment, this can negatively impact your credit score and you may be charged a fee.
• Interest: when you take out a personal loan you will be charged interest on the money you borrow. Before you agree to take out the loan, you will be told the interest rate and exactly how much extra you’ll be required to pay on top of your loan. If the interest rate is 10%, for example, and you’ve taken out £1,000, you will end up paying back £1,100.
• Loan term: you choose the loan term when you take out a personal loan but you can often take one out over anything from a few weeks to up to five years on average. While it may be tempting to choose a longer term, this also means you will be paying interest for a longer period, and it may cost you more overall.  

How can I use a personal loan?

You can use a personal loan for just about anything and as the money is transferred to your bank account, there are no limits on where you spend the money. However, when you apply for a personal loan you will usually be asked the reason you’re applying for the loan. Some of the most common reasons include:

• Debt consolidation: if you are paying off several different debts, with high interest rates, you may be able to use a personal loan to clear these debts. While you are still taking on more debt, using the loan to clear the other debts means you will then just have one payment rather than several. If the interest rate is lower on the loan you will also be saving money overall, as you’re paying out less in interest.
• Wedding: the average cost of a wedding can be around £20,000 and if you don’t have this money saved up, a personal loan could be used.
• Holiday: depending on when you go away, a holiday could cost thousands of pounds and instead of using a credit card to pay for it, you could use a personal loan if you don’t have the money saved up.
• Bridging loan: if you’re selling a property and buying a new one, a bridging loan can be used to fill the gap in between. It can also be used for other property-related funding such as if you’re buying a house at auction or starting a house renovation project.
• Buying a new car: one of the most popular reasons for taking out a personal loan is to buy a new car. This is because using a loan to buy a car means you own the car outright, instead of paying for it with car finance or leasing it. The interest rates are often cheaper with a personal loan than with a car finance agreement too.
• Home improvement: a garage extension, loft conversion or even a garden redesign can cost a lot of money which often needs to be paid out in one go. A personal loan is one way to pay for this, and can often be cheaper than other forms of credit such as credit cards.
• Unexpected expenses: no matter how much we plan, unpredictable things can happen such as household appliances or cars breaking down. If you don’t have the cash to pay for these, a personal loan could be used.

What are the main types of personal loan?

There are several different personal loans to choose from, and the right one for you will depend on your reason for taking out a loan, how much the loan is, and things like your credit score.

The two main types are unsecured and secured loans:

Unsecured loans

These are the most common types of personal loan where the amount of money you can borrow depends on your income and your credit score.

Secured loans

To take out a secured loan you need to have something - such as a property - to use as collateral. You can often take out more money with a secured loan but there’s also a higher risk attached to these. If for any reason you can’t repay the loan, the asset you’ve used as collateral could be taken off you. In the worst-case scenario this could mean your home being repossessed.

There are also guarantor loans which require another person, usually a family member or close friend, to add their name to the loan agreement. The guarantor then agrees that they will make the loan repayments if you’re unable to.

How much can you borrow?

You can usually borrow anything from a few hundred pounds up to £15,000 or £20,000. The amount you can borrow depends on your…

• Credit score
• Income
• Outgoings
• The number of dependents you have
• If anyone else contributes to your income

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Am I eligible for a loan?

To get the best personal loan rate, with the cheapest interest, you will need to have a good credit score. These loans are reserved for those with good, or excellent, credit scores, and these people will also usually be able to borrow higher amounts.

If you don’t have a good credit score, you may still be able to take out a personal loan but the interest rate you will be charged will be higher. You may also be limited to a smaller loan amount.

Will applying for a loan affect my credit score?

When you apply for a loan, you’ll be told the amount you can borrow and also the interest rate. But as you are applying for credit this will also be marked on your credit score, even if you’re not accepted for the loan. This is the case no matter what type of credit you apply for - from a loan to a mortgage.

But there is one way to find out if you might be accepted for a loan without it making a dent on your credit score. You can use a free eligibility checker which will show you how likely it is that you will be accepted for a loan but without making a mark on your credit score.

How to boost your chances of being approved for a loan

If you don’t have a perfect credit score, there are lots of things you can do. None of these are overnight fixes but if you implement them all, your credit score will improve over time. They include:

• Join the electoral roll: signing up to the free electoral roll means you can vote but it also helps your credit score as it is used to verify your identity. It’s free to do this on the Gov.uk website
• Always make repayments on time: if you are late with a credit repayment, or you miss it altogether, this will leave a negative mark on your credit score. If you think you’ll forget set up a direct debit so you never miss a payment.
• Watch your credit ratio: you’ll have a better credit score if you’re not always using all of the credit available to you. If you have a credit card with a limit of £1,000, for example, you don’t want to always have a balance of close to the £1,000 mark.
• Check your credit score: make a note to regularly check your credit score (it’s free) with one of the leading credit reference agencies. This allows you to spot for any inaccuracies such as a wrong address or name.  

Where to find a loan

There are lots of lenders and loans to choose from, all with different rates and requirements. That’s why it’s crucial to compare different loans and not to just go with the first one you find.

Always take the time to shop around and compare loans before you apply to make sure you’re getting the best one for you.

It’s quick and easy to do this with a comparison website and always take the time to read the small print before you sign on the dotted line.

FAQs:

What is an APR?

The APR is the annual percentage rate and it’s used by lenders to calculate how much you will pay when you take out a loan. You must be told the APR before you take out a loan.

How do lenders decide who gets a loan?

Lenders look at a range of different factors when deciding who gets a loan, the amount they can take out, and what interest rate is charged. These include the person’s credit score along with factors like their income and credit score.

What happens if I’m rejected for a loan?

If you’re rejected for a loan don’t panic. There are lots of reasons why this can happen and sometimes it’s not obvious. First, look at your credit record and see if there’s anything strange there - and what your overall rate is. Then have a look at the eligibility for the loan to check you have met the requirements. You can also ask the lender for a reason, although they’re not obligated to give one. Whatever happens, don’t panic and apply for lots of other loans. This can negatively impact your credit score as it can look like you’re not managing your finances well.

Can I get a loan with a bad credit score?

Yes you can get a personal loan if you have a bad credit score but you will usually be charged a higher interest rate and will be able to borrow a smaller amount than a person with a better score.

Are there early repayment fees?

There may be early repayment fees to pay if you pay back your loan early. That’s because the lender is making less money overall from your loan in interest payments. If there are fees to pay these will be listed in the terms and conditions of the loan.

What happens if I can’t repay a loan?

If you’re struggling to repay a loan the first thing to do is speak to your lender. They need to listen to you and help you to find an affordable repayment plan. If you’re not getting anywhere or you need more help, there are a number of free and independent debt charities which can help including Step Change and Citizens Advice.