There are all sorts of reasons you might need to think about getting a personal loan. Maybe you want to pay for a vacation, a wedding, furnish a new home, or consolidate existing, expensive debt.
With low interest rates, borrowing from banks and building societies is quite inexpensive. Our personal loan guide tells you everything you need to know about getting a loan and raising that all-important lump sum.
Below we cover:
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What is a personal loan?
A loan lets you borrow a lump sum that must be repaid over a set number of years. This is usually between one and seven years, although some lenders allow you to borrow for up to 10 years.
The loan is accompanied by a legal contract which stipulates the interest rate applied over this period and the monthly repayments which must be made.
Read more: Is it better to use an overdraft or a credit card?
There are several types of personal loans. Which one you choose will depend on your personal situation.
Unsecured Personal Loans
Unsecured personal loans are a formal contract between you and the lender. It allows you to borrow money on the basis that you agree to repay it within the time you promised, by making the agreed monthly repayments.
You will need a decent credit score to be accepted for the best rates in the market.
Secured Personal Loans
A secured loan involves borrowing money using assets such as a house or car as collateral.
So for homeowners, they can raise money using their property as collateral, or in the case of some auto loans, you can use your vehicle as collateral.
This means that if you cannot repay your loan, the lender can take possession of your property.
Because of the reduced risk to the lender that you don’t repay, you can usually borrow more with a secured loan compared to an unsecured loan.
It also helps people with bad credit scores to access a loan.
How much can I borrow with a personal loan?
You can usually borrow anything between £1,000 and £50,000.
The amount of money a lender will offer will be determined by your credit score, which lenders will use to help them determine how likely you are to repay the loan.
Learn more: Everything you need to know about credit scores
What is the right amount to ask for a personal loan?
It depends on the amount you need to borrow.
Keep in mind that interest rates are tiered depending on the amount you borrow, with sometimes higher rates on smaller loans.
But that’s no reason to borrow more than necessary or to extend the term of the loan longer than necessary.
The faster you repay the money, the less the loan will cost you.
Even with the very low interest rates available today, remember that eventually you will have to pay all the money back. So don’t get too carried away.
What is a good reason to apply for a personal loan?
There are several reasons to take out a personal loan, some better than others.
If the boiler breaks down or you need serious repair work on your house or car, your savings may not reach the amount you need.
With soaring property prices, many people are deciding to improve their homes rather than move.
Expanding families may need a loft extension or conversion to provide an additional bedroom and bathroom. This type of work can cost tens of thousands of pounds.
Those who have accumulated a lot of credit card debt and personal loans may want to consolidate everything into a new loan with a lower interest rate than credit card providers can offer.
Learn more: How soon can you remortgage?
Is it better to have a loan or a credit card?
An alternative option to a loan is to use a 0% purchase credit card. these the cards offer an interest-free period for expenses of up to approximately 18 months.
If you can pay off the balance within that time, you can avoid any interest payments.
You also don’t have to commit to a certain amount of borrowing, you only spend what you need up to the limit set by the card provider.
Monthly repayments are flexible as you will need to make a minimum repayment each month, but you can pay more if you can afford it.
If you want to pay off the balance sooner and stop borrowing, you can.
With regard to personal loans, be aware that:
- You need to decide how much you want.
- Monthly repayments are fixed.
- If you have decided to repay your personal loan in full before the end of the agreed term, prepayment penalties may be imposed on you.
When to use a credit card instead
Credit cards are a good option if you can repay the money in a shorter time.
The most generous cards offer a 22-month 0% period, meaning you could spend £5,000 upfront and pay around £227 a month to ensure the debt is cleared at the end of the interest-free period .
This makes it a totally free loan.
Just know that past the 0% time limit, the rate reverts to high rates of up to 37.7% depending on the card taken out.
If you are unable to clear the debt at the end of the interest-free period, you have the option of taking out a 0% balance transfer card to maintain the 0% interest rate for another fixed period.
Be sure to compare interest-free credit cards to get the best deal.
Do personal loans affect credit rating?
When you apply for a loan, lenders will perform a credit check to assess your eligibility for a loan. Your credit report will indicate that this check has been undertaken.
This in itself is unlikely to have an impact on your credit score, but several checks suggest that your application is being denied and could lower your score.
The higher your credit score, the more reliable you are considered a borrower.
What credit score do I need for a loan?
A credit score varies between 300 and 850. The number reflects how you have managed debt in the past.
Lenders will look for a score that shows you can successfully repay your loans and pay your bills on time.
But they don’t release the scores they need, so it’s up to you to play by the rules and pay off the bills and loans as agreed.
Although a low credit score limits your options, you may still be able to get a personal loan as there are specialist companies that will offer loans, but at a higher interest rate.
You can also consider a secured loan in this case.
You can get a good idea of where you stand by checking your credit score before applying for a loan.
Equifax, Experian and TransUnion will all provide you with a free credit report.
Read more: “I paid off my £2,300 overdraft in six weeks”
What credit rating is needed for a £50,000 personal loan?
Since lenders don’t publish the score level they need to borrow, there’s no hard number to aim for.
But you will need a high score to borrow a large sum. Those with lower credit scores will be limited to smaller amounts.
How to get a personal loan
Use comparison websites such as Confused.com to ensure you find the cheapest rates on the market. Enter what you want to borrow over how long and you’ll have the options starting with those offering the lowest rates.
Once you have found an affordable loan you can usually apply online and as long as you are accepted the money can sometimes be with you the same day.
Don’t make a handful of inquiries with the goal of picking the cheapest deal, as this could hurt your credit score and force you to pay a higher rate or even be denied credit entirely.
Best way to get a loan with bad credit
Use comparison websites to find companies that offer personal loans to people with bad credit.
Rates can be high and typical amounts can be lower. But there are options.
If you need help with a mortgage and have bad credit, read our guide to applying for a mortgage with bad credit.
Find the cheapest personal loan
As with any loan, you’ll want to look for the lowest interest rate to avoid paying back more than necessary.
Checking which bank is best for personal loans is a simple task if you use a comparison service.
Here are some of the best rates currently available on an unsecured £5,000 loan:
|Sainsbury’s Bank (Nectar card holder)||3.3%|
|Hitachi Personal Finance||3.8%|
Remember that the representative APR of a personal loan is the rate at which at least 51% of borrowers will be charged, the actual rate your lender offers you might be a bit higher.
What happens to personal loans when you die?
The value of everything you own, including savings, investments, property and possessions – known as your estate – is used to pay the debt after death.
Learn more: What happens to debts after you die?
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