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Finding the best 12 month loan for you

By Laura Rettie, Personal Finance Journalist.

Laura Rettie

12 month loans are a popular type of loan, but they can be tough to understand fully. Learn all you need to know about 12 month loans with our guide.

What can I use a 12 month loan for?

You can use a 12 month loan like a personal loan, which means you can spend it on anything you please.

Reasons people may need a 12 month loan are:

  • To buy a new car
  • To pay for a family holiday or event
  • To pay for furniture or white goods
  • To pay off debts

12 month loans are not cheap, but they can help if you need to spread the cost of a large purchase or increase cash flow for a short period.

What’s the interest rate on a 12 month loan?

The interest rate indicates how much money you’ll pay back on top of the amount of cash borrowed.

Interest rates on 12 month loans can be higher than interest rates on longer-term personal loans, although you’ll borrow for a shorter period which will reduce the interest paid overall.

The interest rate you’ll pay on a 12 month loan could be anything between 3% and 99.9% depending on:

  • the type of lender
  • how much you borrow
  • your credit rating

Check the annual percentage rate (APR) you’re quoted and the total cost of the loan before you agree to anything.  Bear in mind, the higher the interest rate, the more the loan will cost you.

What are the advantages of 12 month loans?

A 12 month loan is a useful way to get finance quickly to pay for large purchases or increase cash flow in the short term.

Providing you have a good credit record and keep to your repayment plan, a 12 month loan can be a cheaper alternative to credit card borrowing.

A 12 month loan can help you:

  • Budget the cost of large purchases
  • Solve short term cashflows
  • Take control and manage existing debts
  • Repay borrowed cash quickly and pay less interest

The best lenders offer low rate loans with flexible payment options so providing you don’t default on repayments, a 12 month loan is a low-risk form of credit.

What are the disadvantages of 12 month loans?

As long as you keep up repayments and don’t borrow more than you can afford, a 12 month loan can be a good borrowing option, however,  there are some pitfalls to watch for:

  • Short term loans often have higher interest rates
  • You’ll have less time to pay off your loan so monthly payments will be larger
  • Your approved interest rate may be higher than advertised
  • You could damage your credit score if you default on repayment
  • Penalties for late or missed payments may be high
  • A 12-month loan could have less flexible repayment terms

Only take a short term loan as a last option and watch out for very high interest rates from some direct lenders.  If you can afford to pay for purchases or pay off other debts with cash or savings, turn to those first.

How do I apply for a 12 month loan?

You can apply for a 12 month loan in several ways.

  • Online with a direct lender, bank or broker
  • Over the phone
  • In person at a bank branch

If you’re clear about your borrowing needs, then you may benefit from better rates if you apply for your loan online with a direct lender or via a broker.

However, if you need to talk about your options it may be better to apply for a loan over the phone or in person.

Documents you need

This will depend on where you apply for the loan. If you apply with your current bank, they’ll have your records so it may be quite simple, however, a direct lender or loan broker will need you to prove your identity and loan eligibility.

Documents you may need to provide include:

  • Proof of identity, such as your passport, UK driving license and a bank statement less than 3 months old.
  • Proof of residence, such as a utility bill less than 3 months old, mortgage statement or water bill less than 12 months old.
  • Proof of your right to live and work in the UK.
  • Proof of income, such as payslips, 12 months bank statements, tax calculation, pension or benefit evidence.
  • Employer details, evidence of self-employment or directorship.

You will need a bank account with the facility to set up a direct debit or standing order and fit any other eligibility criteria set by the lender.

Are there any alternatives to 12 month loans?

There are several other options to consider if you need a short term loan.

Buy Now Pay Later:  An Interest-free, point of purchase credit option available from most online retailers.  This is ideal for spreading the cost of online shopping but less flexible than a 12 month loan.

Credit cards:  A type of payment card which allows you to use borrowed money to pay for goods and services. You can pay off the amount you owe in full each month or make smaller repayments with interest.

Instalment loans:  Borrow a sum of money and choose to repay the 12 month instalment loan in set amounts either weekly or monthly, but beware of very high interest rates from direct lenders.

Guarantor loans: A type of unsecured loan where someone else guarantees that the loan repayments will be made if you can’t make your repayments. You may pay a  higher interest rate if you can’t provide evidence of income.

What does APR mean?

APR is short for Annual Percentage Rate - which means the amount in interest you’ll pay on top of the amount you’ve borrowed. Any extra fees or charges are added to the loan amount before APR is calculated.

It’s a legal requirement for credit lenders to show their APR so an easy and fair comparison of interest rates can be made between lenders.

More loan options

Read more about different types of loans; bad credit loanscar loans and home improvement loans

The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.

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Frequently asked questions

Can I have two loans at the same time?

Yes, you can have multiple loans and as long as you keep up repayments it won’t hurt your credit score.

Many people have more than one line of credit, for instance, you may have car finance, a credit card, a mortgage and a personal loan.

How soon do I have to start paying back my 12 month loan?

Most lenders will require you to set up a repayment plan and start payments within 30 days of receiving the funds.  You’ll be charged interest from the date you recieve the money in your account.

Can I get a 12 month loan if I’m unemployed?

It’s possible, but it will be difficult and you’ll most likely have to pay a high interest rate.  Most lenders will require you to provide a source of regular income like a salary or a pension. A clean credit history and good credit score will boost your chance of approval but think carefully before taking out a loan if you don’t have a reliable way to repay it.

What is a 12 month loan?

It’s money you can borrow from a bank or money lender that’s paid back over 12 months with interest.

You can typically borrow anything between £500 and £25,000 and apply for credit via a bank, direct lender or broker.

It’s a short term unsecured loan, which means you don’t need to offer your property or a high-value asset as security against the loan.

Will applying for a 12 month loan hurt my credit score?

No, most lenders will pre-approve or reject you after a soft credit check.

A soft check allows banks, loan brokers and direct lenders to check your creditworthiness without affecting your credit rating.

Multiple loan applications in a short time period could have a negative impact though, so it’s best to use a broker and seek pre-approval for credit,  instead of applying to lots of lenders.

How quickly can I get a 12 month loan?

Online lenders can often give you a decision within minutes and you could get the money in your account within a couple of hours if you provide all the right documentation.

High street banks and traditional lenders may take longer, although if you apply with your own bank and your financial circumstances are straightforward, it can be arranged within an hour.

Can I get a 12 month loan with bad credit?

Yes, you can, but you’ll pay high interest rates so your loan will be expensive and you may find it tricky to get the amount you want.

There are lots of specialist money lenders who’ll consider your application and you’ll find it’s easier to get a 12 month loan from direct lenders if your credit score is poor.

Check your credit report and if your score is low, find out how to rebuild your rating so you can get better credit and borrowing choices in the future.