In this guide
There are all sorts of reasons you might be thinking about getting a personal loan – from paying for a holiday to consolidating debts, here’s how to get a deal that’s right for you.
Despite interest rates shooting up over the last year, you can still find loans that are relatively affordable.
Our personal loan guide tells you what you need to know about getting a loan and raising that all-important lump sum.
Below we cover:
- What is a personal loan?
- How much can you borrow?
- Reasons for taking out a personal loan
- Loans vs credit cards: which is best?
- Do loans affect your credit score?
- How to get a personal loan
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What is a personal loan?
A loan allows you to borrow a lump sum that is to be repaid over a set number of years. This is usually between one and seven years, though some lenders will allow you to borrow up to 10 years.
The loan comes with a legal contract that states the rate of interest charged over that term, and the monthly repayments that must be made.
Find out more: Is it better to use an overdraft or credit card?
There are a number of different types of personal loans. The one you choose will depend on your individual circumstances.
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 pay it back within the timeframe you’ve promised, making the agreed monthly repayments.
You will need a decent credit score to be accepted for the very best rates on the market.
Secured personal loans
A secured loan is where you borrow money using assets such as a house or car as security.
So for homeowners, they can raise cash using their property as security or, in the case of some car loans, you can use your vehicle as the security.
This means that if you can’t pay back your loan, the lender can take possession of your asset.
Because of the reduced risk for the lender of you not repaying, you can usually borrow more with a secured loan compared to an unsecured one.
It also helps those with poor credit scores access a loan.
How much can I borrow with a personal loan?
You can typically borrow anything from £1,000 – £50,000.
The amount of money a lender will offer will be determined by a number of factors including your credit rating, which lenders will use to help them work out how likely you are to pay the loan back.
Find out more: Everything you need to know about credit scores
What is a good amount to ask for a personal loan?
It depends on how much you need to borrow.
It’s worth bearing in mind that interest rates are tiered according to how much you borrow, with rates sometimes higher on smaller loans.
But that’s no reason to borrow more than you need – or to stretch the loan term longer than you need to.
The quicker you pay the money back, the less the loan will cost you.
Even if you secure a relatively low interest rate on a loan, remember you’ll have to pay all the money back eventually. So don’t get too carried away.
What is a good reason to ask for a personal loan?
There are several reasons for taking out a personal loan – some better than others.
Emergency expenses
If the boiler breaks down or you need some serious repair work done on your home or car, your savings might not stretch to the kind of money needed.
Home improvements
With house prices soaring many people are deciding to improve their homes rather than move.
Expanding families might need an extension or loft conversion to provide an extra bedroom and bathroom. This kind of work can run into tens of thousands of pounds.
Debt consolidation
Those who have built up lots of credit card debt and personal loans might want to wrap it all into one new loan that has a lower rate of interest than credit card providers can offer.
Find out 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 cards offer an interest-free period for spending of up to around 18 months.
If you can pay the balance off in that time, you can avoid any interest payments altogether.
You don’t have to commit to a certain amount of borrowing either, only spending 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 can pay more if you can afford it.
Should you want to clear the balance early and stop borrowing, you can do so.
When it comes to personal loans, be aware:
- You need to decide the sum you want.
- Monthly repayments are fixed.
- If you decided to repay your personal loan in full before the end of the agreed term, you may be charged early repayment penalties.
When to use a credit card instead
Credit cards are a good option if you can pay back the money within a shorter period of time.
The most generous cards offer a 0% period of 24 months which means you could spend £5,000 at the outset and pay back around £208 a month to ensure the debt is cleared by the time the interest-free period finishes.
This makes it a completely free loan.
Just be aware that after the 0% period runs out, the rate reverts to high rates of up to 37.7%, depending on the card you take out.
If you don’t manage to wipe the debt by the end of the interest-free period, there could be the option of taking out a 0% balance transfer card to maintain the 0% interest rate for another fixed period.
Make sure you compare interest-free credit cards to get the best value deal.
Do personal loans affect credit scores?
When you apply for a loan, lenders will run a credit check to assess your eligibility for a loan. Your credit file will display that this check has been undertaken.
This in itself is unlikely to impact your credit score, but multiple checks suggest you’re being turned down and could lower your score.
The higher your credit score, the more reliable a borrower you are considered to be.
What credit score do I need for a loan?
A credit score ranges between 300 and 850. The number reflects how you’ve managed debt in the past.
Lenders will be looking for a score that shows you can successfully repay loans and pay bills on time.
But they don’t publicise what scores they require, so it’s up to you to play by the book and repay bills and loans as agreed.
Although having 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 likely at a higher rate of interest.
You might also consider a secured loan in this instance.
You can get a good idea of where you stand by checking your credit score before you apply for a loan.
Equifax, Experian and TransUnion will all give you a credit report free of charge.
Find out more: “I paid off my £2,300 overdraft in six weeks”
What credit score is needed for a £50,000 personal loan?
Since lenders do not publicise the level of score they require for borrowing there’s no precise number to aim for.
But you will need a high score to borrow a large amount. Those with lower credit scores will be limited to smaller amounts.
How to get a personal loan
Use our loans comparison tool to compare rates available on the market. Enter what you want to borrow over how long and you will be given the options starting with those offering the lowest rates.
Once you have found an affordable loan you can typically apply online and as long as you are accepted the money can sometimes be with you on the same day.
Don’t make a handful of applications with the view to choosing the cheapest offer as it may damage your credit score result in you paying a higher rate, or even be refused credit entirely.
Can I get an interest-free loan from the government?
A Treasury-backed interest-free loan scheme is being rolled out across the UK for financially vulnerable people who cannot get access to mainstream forms of credit, due to not being able to afford the interest payments.
It’s called the No Interest Loan Scheme (NILS), and lets those eligible borrow between £100 and £2,000, with the average loan being £500. Borrowers can repay the loan over six to eighteen months.
The initial expansion of the scheme, starting in September, will see 20,000 more people eligible. This number is projected to rise to around 500,000 once the scheme has fully been rolled out.
You can find out more information about the No Interest Loan Scheme on its website.
Best way to get a loan with bad credit, or if you can’t afford interest payments
Use comparison websites to find companies that offer personal loans for those with bad credit.
Rates might be high and typical amounts could be lower. But there are options.
If you need help with a mortgage and have bad credit, read our guide on applying for a mortgage with bad credit.
Finding the cheapest personal loan
As with any borrowing, you will want to shop around for the lowest rate of interest to avoid repaying more than you need to.
Checking which bank is the best for personal loans is a straightforward task if using a comparison service.
Here are some of best rates available at the moment on a £5,000 unsecured loan:
| Provider | Representative APR |
| Novuna Personal Finance | 5.9% |
| Sainsbury’s Bank | 5.9% |
| AA* (member) | 6.3% |
| Post Office | 6.3% |
| M&S Bank | 6.5% |
| Santander | 7.2% |
Just remember that the representative APR on a personal loan is the rate that at least 51% of borrowers will be charged, the actual rate your lender offers you could be quite 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 for debt after death.
Find out more: What happens to debts after you die?
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