How to find the best personal loan
What exactly is a personal loan?
A personal loan is an agreement between an individual and a financial institution, where the borrower is lent a lump sum that they repay in fixed amounts over a fixed period, with a fixed interest rate. Most personal loans are offered on unsecured terms, which means they're assessed on our credit records rather than our existing assets. They allow us to borrow without putting our homes or other belongings at risk, although lenders can take us to court if we default on repayments.
Note that payday loans are not the same as personal loans. Payday loans offer small amounts of cash on very expensive terms, often to people who find it hard to get credit elsewhere. They appeal because they seem convenient and simple, with interest and fees often described in pounds and pence - but the equivalent APRs are usually well above 1,000%. Choose don't list payday lenders, as we explain here, and there are plenty of alternatives.
How much can I borrow, and how much will it cost?
How much we can borrow, and how much it will cost, depends on our circumstances – our age, any other borrowing we have (including credit cards and overdrafts), and our credit history. Look for the lowest possible representative APR for the amount required: different lenders quote different rates for similar amounts.
Also note the use of the word "representative". Personal loans are subject to risk-based repricing, and the use of the phrase "representative APR" means that a lender need only offer that particular rate to at least 51% of applicants; up to 49% of people who apply will be offered a higher APR. The better our credit history, the more likely we are to get the quoted rate.
Where can I find the cheapest personal loan?
The main rule for getting the cheapest loan possible is to borrow as little as possible for as short a period as possible. Those who need to keep their monthly repayments low will often find that a longer repayment period suits them better, but this will cost more overall. Play with the sliders above to see how a longer or shorter repayment period, or different monthly repayments, affects the total cost of a loan for various amounts.
People wanting to borrow a fairly small amount – up to about £5,000, for example – may find there are cheaper ways to borrow, like a specialist credit card. Credit cards have much lower lending limits, however, and can be more expensive if used wrongly. There's more on using a credit card to borrow cheaply in this guide.
What do I need to apply for a personal loan?
Unsecured loans aren't available to undischarged bankrupts, and some lenders won't consider anyone who has any kind of serious debt problem in their history, no matter how long ago.
Beyond that, the basic eligibility criteria for most loans is that we're aged between 18 and 79, and permanent UK residents with a UK bank or building society account. Most lenders also expect us to have a steady income; minimum income thresholds vary lender by lender. To find out more about eligibility for a particular loan from a particular lender, hover over the text asking "will you get this loan?" in the table above.
Then we'll need to have proof of ID and details of our recent addresses, monthly income and expenditure including any other borrowing (plus credit cards and store cards), plus our employer's details (or those of our primary income if we're not employed). We'll also need the details of the accounts we want our loan paid in to and from which we'll make repayments.
Why can't I get a loan from lender x?
Some lenders, including some of those listed above, only provide loans to existing customers. Others will lend to people who bank elsewhere, but may save their best rates for their own customers. If a loan is only available to existing customers, the lender will usually state that before any other eligibility criteria.
It also depends how much we want to borrow, and how long for. While many lenders offer smaller value loans, there's less choice for those who want to borrow a much larger amount, or over a longer term than usual; repayment periods generally range from one to five years. The higher the loan value, the more likely it is we can access a longer repayment period.
The other reason we may fail to get a loan from a lender is the credit check, which can be an issue for people with spotless credit records too. Lenders are looking for a good borrowing history – which those who've never had a loan or credit card, or paid off the latter in full every month without fail, may lack. There's more on what makes a "good" credit history here.
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