If you’re considering asking for a personal loan, it’s important to weigh your alternatives carefully before proceeding.
This book will teach you all you need to know about the application process, including what to avoid, in order to enhance your chances of acceptance.
What is the definition of a personal loan?
A personal loan enables you to borrow a certain amount of money for a specified period of time. Generally, you may borrow for a period of between one and five years, while in exceptional situations, you may be able to borrow for up to seven years.
Typically, you will be able to borrow between £1,000 and £15,000, with some suppliers providing loan sums of up to £25,000.
Personal loans are sometimes referred to as unsecured loans since, unlike secured loans, they do not need the use of collateral such as your property. This implies they are less risky since you are not at risk of losing your house if you fall behind on your repayments.
What can I do with a personal loan?
Personal loans are an excellent option if you wish to:
- Invest in home renovations
- buy a new automobile
- debt consolidation
- compensate for a wedding
- compensate for a vacation.
What should I consider before submitting an application?
Numerous variables should be considered prior to apply for a personal loan. Below, we’ve summarised the key points:
- Are you eligible to participate?
One of the most critical variables to examine is your eligibility for a personal loan in UK.
The most competitive loans will be held for individuals with excellent credit ratings, so if yours is below average, you may have difficulty obtaining a personal loan or, if you do, you may be required to pay a higher interest rate.
It may be worthwhile to use an eligibility checker, which some lenders now provide, prior to applying for a personal loan. This will provide you with an idea of your likelihood of being approved for a specific loan and will have no effect on your credit score.
This is because eligibility checkers do a soft rather than a ‘hard’ search of your credit records.
Too many hard searches on your credit file in a short period of time might be seen adversely by lenders as an indication you’re having difficulty obtaining credit.
- How much money do you require?
Additionally, you should consider how much money you need to borrow and how much you can really afford to repay.
The most competitive interest rates are often available for loan amounts of £7,500 and above, whereas loans of less than £2,000 might be much more expensive. This may entice you to get a bigger loan than you need – or can afford. It pays to do your calculations properly and to ensure that you have a repayment plan in place to ensure that you return your loan on time.
- How long do you have to repay the loan?
When doing your calculations, you’ll also want to factor in the payback duration. Monthly payments will be cheaper if you pick a longer repayment period. However, this also implies that the interest rate will likely be greater, and you will end up paying more in total.
If you can afford to make greater monthly payments in order to pay off your debt faster, it will work out cheaper in the long run.
- What is the Annual Percentage Rate (APR)?
The APR, or annual percentage rate, takes into account both the interest rate you’ll pay and any extra charges, so it’s critical to understand what it is.
However, keep aware that the APR advertised is not always the one you get. This is because only 51% of successful applicants must be provided the stated APR, while the other 49% may be offered a higher rate.
- What are the applicable fees?
Additionally, you should check to see if there are any costs associated with your loan before proceeding. Certain personal loans include an arrangement fee, but you may also be charged for late payments or for paying off your loan early.
- Are there any less expensive alternatives?
Finally, you should determine whether or not a personal loan is a right alternative for you.
A 0% purchase credit card may be more ideal if you’re planning to make a one-time purchase, such as a new automobile or to pay for a vacation. Payments may be stretched out over many months interest-free, but keep in mind that when the 0% bargain expires, interest will begin to accrue.
Alternatively, if you need to consolidate current credit card debt, a 0% balance transfer credit card may be a better alternative — once again, you’ll benefit from interest-free payments for many months.
Bear in mind that there is often a transfer charge and that if you do not pay off the debt before the 0% offer expires, you will begin paying interest.
I’m ready to apply — what should I do next?
If you’ve determined that a personal loan is the best option for you and are ready to apply, you’ll need the following information:
- your given name and birth date
- your current address and address history for the preceding three years
- particulars about your work
- your wages or earnings
- additional financial obligations, such as a mortgage or other forms of loans.
Generally, you must be at least 18 years old to qualify for a personal loan, while some loans need you to be 21 years old or older. Additionally, you must be employed and/or earn a certain minimum salary.
Certain lenders may consider certain benefits as income, but you should verify.
Your identity will be verified using your credit report and electoral roll (so ensure you are on the electoral register and that it is current), and the lender will also use your credit report to assess whether to approve your application.
Is it possible to get a personal loan if I am self-employed?
If you are self-employed, you must typically have at least one full year of audited financial statements before applying for a loan, but certain lenders may need more.
What happens when I submit an application for a loan?
If your application is approved, you will be sent or emailed a loan agreement. Before money may be sent to your bank account, you must sign and return this form. This might be accomplished in a couple of hours, but is more often than not completed in a few days.
After receiving money, your first payment is typically due the following month, unless you have chosen a payment vacation.
This occurs when you and the lender agree to stop payments for a certain length of time. It’s critical to agree on the vacation in advance, rather than just stopping payments, since this will have a negative effect on your credit score.
You’ll need to make up the difference in payments by either extending the term or raising your payments for the remaining duration.
Is it possible for me to alter my mind?
If you change your mind after applying for a personal loan, you have a 14-day cooling-off period beginning on the day the loan agreement was signed or upon receipt of a copy of the agreement, whichever is later.
If the monies have already been received, you will have 30 days to refund them. Interest may only be charged for the time you held the credit, therefore any further costs will be repaid.
What if my application is denied?
If your loan application is denied, you may inquire as to why. While it may not be able to provide you with the precise reason, it should be able to provide you with an indication, such as you failed a credit check.
It’s therefore worthwhile to verify your credit report for further information and to ensure that there are no errors. If you discover any mistakes, you must contact the appropriate credit reference agency to request that the error(s) be fixed.
You must explain why the statement is inaccurate and offer any necessary supporting evidence. Additionally, you might include a Notice of Correction to explain a missing payment.
After completing these measures, it is recommended that you refrain from applying for another loan for at least three months, preferably six.
Each time you apply for a loan or other type of credit, it leaves a ‘footprint’ on your credit report, and as previously stated, if you make several applications in a short period of time, lenders may interpret this as a sign you’re having difficulty obtaining credit or are in desperate need of money.
In any case, it will almost certainly make them hesitant to lend to you.