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Finding the right personal loan for you. 

By Laura Rettie, Personal Finance Journalist.

Laura Rettie

Unsecured personal loans allow you to borrow up to £50,000. Find out how they work with our guide. 

What can unsecured loans be used for?

Unsecured loans can be used for anything you need them for, such as: 

Some loans can be used for small business purposes, however, providers may have restrictions against this, so it’s always best to check the terms and conditions if you wanted to use a personal loan to pay for business expenses.

How much can I borrow with a personal loan?

The amount you can borrow will depend on your affordability. When looking at your application, loan lenders will review your income and compare it with any regular outgoings you have, like rent and bills. If you have a low income and have a lot of regular expensive outgoings to pay, you may find lenders will only let you borrow a small amount of money.

For many personal loans, the most you can borrow is around £25,000, but some lenders may have a higher limit if you have a good credit rating. 

A credit rating is an evaluation of your creditworthiness - scoring you on how likely you are to properly manage and repay a loan. There are three main credit reference agencies in the UK that give you a unique credit score, Experian, Equifax, and TransUnion.

A good credit score for each is: 

  • Between 881-960 out of 999 for Experian
  • Between 420-465 out of 700 for Equifax
  • Between 604-627 out of 710 for TransUnion

It's unlikely you'll find personal loans offering more than £50,000 because personal loans are unsecured, meaning lending larger amounts is riskier for loan companies. 

How much does a personal loan cost?

How much your loan will cost you will depend on:

  • The total amount borrowed
  • The interest rate of the loan 
  • Any additional fees and charges

To keep the cost of your borrowing down, it's important you borrow only what you need. As tempting as it may be to take the money if you’re offered a large loan, remember that it’s a big commitment and the more you borrow, the longer it’s going to take you to pay back and the more expensive it will be.

The interest rate of a loan is usually displayed as APR (annual percentage rate). This percentage includes the rate of interest and any fees you'll have to pay. The lower the APR, the less interest you'll have to pay for your loan. A £1,000 loan with a 10% APR will cost you less than a £1,000 loan with a 15% APR if both are paid off during the same period. 

Fees and charges can also make your loan more expensive, and there are multiple that you could have to pay. Some of the common fees are: 

Arrangement fee - This is an admin fee charged by some lenders for arranging your personal loan. The average costs around £20. 

Late payment fees - A fee you’ll have to pay if you miss a loan repayment. For most loans, this fee can’t be around £15 or more, however, you’re also likely to be charged interest on the overdue amount. 

Early repayment fee - You’ll have to pay this if you pay off your entire loan early. The amount you pay will likely be a percentage of the amount you’ve borrowed. 

With all this to think about, working out the cost of your loan can be tricky. When comparing loans to find the best value for money, make sure you compare APR, interest rates, and the total amount you have to repay. There are many loan cost calculators online to help you work out which loan is right for you.

What do I need to consider before taking out a personal loan?

Personal loans are a long-term commitment repaid over multiple years. To make sure an unsecured loan is right for you, here are some questions you should consider: 

Can you afford to pay it back?

You'll need to be honest about your financial circumstances and if you have the income and budget to reliably keep up with your repayments. Missing a loan repayment can have consequences on your credit rating, and you could be taken to court if you don’t keep up with repayments. 

Are you happy to repay the loan long after you’ve used the money from it?

Many people use personal loans to help them afford a large, one-off purchase, such as a new car, a holiday, or home furniture. Loans can take a long time to repay, which means you'll still be paying off your loan long after you’ve made the purchase, and even after you’ve stopped using the item. Ask yourself if whatever you’re using the loan for will still be worth it to you in one to five years time.

For example, if you get a loan for £5,000 to buy a new car at 15% APR for 5 years, you’ll repay close to £7,000 because of interest. In that same time period, the car you’ve bought for £5,000 may now only be worth around £2,500. Plus, it’s likely that you may not even be using that same car by the end of the five years, meaning that you may be repaying for something that you’re not even using. 

Is it the cheapest form of borrowing available to you? 

Personal loans can be expensive, and there may be cheaper options depending on your circumstances. 

For example, you could get a 0% credit card lasting 18 months, borrow the amount you need, and then repay the balance before your 0% interest period ends. This saves you money because you won’t need to pay interest. 

What's your job security like? 

Unsecured personal loans are a long-term commitment, so you need to be sure you'll be financially secure during the repayment period. A personal loan may suit you if you're in a stable job and likely to remain in the position. A loan may be a gamble if you're self-employed or a freelancer where your income isn’t always consistent every month. 

If you’re in a line of work where your job is at risk, you’ll need to seriously consider what might happen if you were to lose your job and are unable to keep up your repayments. 

What happens if I can't pay a personal loan?

Not paying a personal loan can lead to serious consequences. It will harm your credit rating, and the worst-case scenario could see your personal items repossessed. 

If you haven’t got enough money in your bank account to afford the repayment, the lender will still try to withdraw the money due from your account. You may be charged £15 for each failed attempt.

A missed payment will also harm your credit rating. To help protect it, you could negotiate with a lender to change when you’re due to pay, giving yourself more time to get the money together.

When you miss a repayment, you’ll default on your personal loan.

Once you default, your lender will try to contact you to make a repayment. If you're still unable to pay, the lender may sell your unsecured debt to a debt collection agency, which will likely bombard you with calls and letters to get you to pay. 

Eventually, the lender may issue a CCJ (County Court Judgement) and take you to court. A CCJ is recorded on your credit report and will negatively affect your credit rating. 

If you're still unable to repay the loan after a CCJ, the lender can obtain a warrant and employ bailiffs to collect your personal items to be used to repay the debt. 

Can I get a personal loan with bad credit?

Loan providers use your credit rating to see if you meet their personal loan eligibility criteria. You'll be approved for most personal loans with at least a moderate credit rating. However, you'll need a good credit rating to get low interest personal loans. 

If you have a poor credit score, your application for a personal loan may be rejected. If not, you may not be offered the best terms, making your loan more expensive. 

To help you get the best personal loan possible, you can boost your credit rating by: 

  • Signing up to vote if you haven't already
  • Keeping your details up to date on your credit report
  • Only using up to 30% of your credit limit on any credit cards
  • Paying off any existing debt you have
  • Keeping current accounts and credit cards open to build a long credit history
  • Keeping up with repayments on current credit products

What are the advantages and disadvantages of unsecured loans?

Pros 

  • Quick application process
  • Can be approved and get your loan within a week
  • You choose the length of your repayment period
  • Can be spent on anything
  • You can conveniently apply for personal loans online
  • Managing the loan well can boost your credit rating

Cons

  • They're a long-term commitment
  • Higher interest rates when compared to secured loans
  • Difficult to borrow with poor credit
  • Expensive fees for missed repayments

Are there any alternatives to personal loans?

If you can't get a personal loan or want to consider your other options, there are a few other solutions you can try. 

Secured loans

Secured loans are when you use a high-value asset to secure a loan - usually your home. You're usually able to borrow more with a secured loan, however, you risk losing your home if you can’t afford to keep up repayments.

An overdraft

It's possible to apply for an overdraft on your current account, allowing you to borrow directly from your bank. Overdrafts may charge you for each day you're overdrawn and can be a very expensive form of borrowing, so you must repay what you borrow quickly. 

0% credit cards 

0% credit cards are interest-free for a period of time, usually between 12 to 18 months. With these cards, you can borrow what you need and repay what you've borrowed in monthly instalments during your 0% period. Doing this means you won't have to pay interest.

You may need a good credit rating to be approved for these cards, but they're an option worth exploring because they can help you save money.

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 you get a personal loan when you are self-employed?

You can get a personal loan when self-employed, but it may be more challenging because you'll have to prove your income to show you can afford the loan repayments. As long as you have a good credit history you should be able to find a lender willing to loan you money. 

Can I repay my personal loan early?

Some personal loans will allow you to repay your loan early, but many won't. If you can repay your loan off earlier than originally agreed, a fee will sometimes be charged. This is either called an early exit fee or an early repayment fee.

Do personal loans show up on your credit report?

Yes, personal loans appear on your credit report, but they're not viewed by other lenders negatively and shouldn't damage your credit rating if managed well.

Do I have to pay income tax on a personal loan?

No, you won't have to pay income tax on a personal loan. Your money isn't considered income because you have to pay the money back, unlike your wages or other earnings. If you're filling out an income tax return, you don't need to report any personal loans you've taken out.

How long does it take to get approved for a personal loan?

The application process for a personal loan can take minutes, and you may be approved within the same day. 

It shouldn't take more than a week for the money borrowed to appear in your current account.

What is a good interest rate on a personal loan?

The best personal loan rates can be as low as 3% APR but they can also be as high as 100% APR. The best personal loans will be the ones with the lowest APR, although these may not be accessible to everyone. To help you get a best deals on your personal loan, work on improving your credit score.

Why are unsecured loans expensive?

Personal loans charge a higher interest rate than other types of loans to protect the lender. If you cannot repay the loan, there's nothing the lender can use as repayment. Lenders charge a high interest rate to make it less risky for them.

What is a personal loan, and how does it work?

An unsecured personal loan is where you borrow money from a lender and repay it back in monthly instalments, typically lasting between twelve months to seven years. When repaying your loan, you'll pay interest and any additional fees on top of the borrowed money. 

How much you’re able to borrow will depend on your affordability and credit history, but typically personal loans range from £1,000 up to £25,000, although there are some providers on the market that will lend you as much as £50,000. 

Unsecured personal loans will typically have higher rates of interest compared to secured loans, making them more expensive, especially if you're repaying over a long period of time.

Will a personal loan affect my credit score?

Every time you apply for and take out a personal loan, it'll be recorded on your credit report. Having a personal loan on your credit report shouldn't affect your future eligibility, as long as you’re responsible with it. 

Personal loans can improve your credit rating if you manage your loan well and make repayments on time, but it also goes the other way. If you miss repayments or default on your loan, your credit rating may suffer, making it more difficult to get credit products in the future.

How long does it take to get approved for a personal loan?

The application process for a personal loan can take minutes, and you may be approved within the same day. 

It shouldn't take more than a week for the money borrowed to appear in your current account.

What is a good interest rate on a personal loan?

The best personal loan rates can be as low as 3% APR but they can also be as high as 100% APR. The best personal loans will be the ones with the lowest APR, although these may not be accessible to everyone. To help you get a best deals on your personal loan, work on improving your credit score.