The best personal loans allow you to borrow a sum of money over an agreed period at the lowest interest rate you can get. You then repay this amount, plus interest, usually in monthly instalments until the debt is paid off.
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How to choose the best personal loan
When searching for the best personal loan lenders, look for the ones that offer you the cheapest rates. The best personal loan for your situation often depends on:
- how much you need to borrow
- the length of time you need to repay the loan over
- how much you can afford to repay each month
- your credit history
If you have a less-than-perfect credit score, there are specialist loans for bad credit that may be an option to consider. But it may be worth seeing if you can improve your credit score before applying, as this could help you get accepted for a loan and access lower rates of interest.
How to use APR to compare loans
To help you compare the best personal loan deals, lenders need to display the cost of a loan as a percentage, known as the annual percentage rate (APR). This represents the yearly cost of borrowing money, taking into account the interest rate and any standard fees. You can compare loans by APR to find the cheapest one that suits your needs.
It’s important to consider the APR alongside other features of a loan to decide if it’s right for you. However, be aware that your personal APR could be higher, lower or the same as the advertised rate. The advertised APR – known as the representative APR – is the rate that at least 51% of applicants will receive. This means that 49% of applicants could receive a different rate.
Checking your eligibility using a loan comparison service can show you the loan deals you’re likely to qualify for and the loan rate you’re likely to receive. You’ll need to enter a few details such as your income and employment status to get a personalised quote.
What interest rate could you receive?
The Annual Percentage Rate (APR) shows you how much it would cost to borrow money over one year, combining interest and fees that the lender charges.
When you search for credit, providers need to give a representative APR to allow you to compare different products on a like-for-like basis.
However, the best loan rates will only be available to some customers. The rate you’re offered when applying for a loan will depend on multiple factors, such as your credit history, income and pre-existing level of debt.
Do larger loans have cheaper loan interest rates?
Smaller loans often come with a higher interest rate than larger loans. Most lenders have a loan calculator you can use to get an idea of the interest rate for a particular amount, the monthly repayment amount and the total cost of borrowing.
However, this doesn’t mean that you should borrow more than you need – it’s likely that the total cost of borrowing for a larger loan would still be more, even if the rate is cheaper. And remember that the interest rate you get will depend on your particular circumstances.
How personal loans work
When you take out a personal loan, you receive the money as a lump sum from your chosen lender. You then need to repay this amount, plus the interest the lender charges, usually in monthly instalments over the agreed period.
You can use a loan for many purposes, including to pay for a holiday, a wedding, a new car, home improvements, or an emergency expense. You can also use it for debt consolidation, although it’s important to be aware of the costs this may involve.
The interest rate you receive depends on several factors, including the amount you want to borrow and your credit score.
Lenders typically charge a higher interest rate if you have a lower credit score, because you’re seen as riskier to lend to than someone with a better credit history.
The APR tells you the cost of your loan, including interest and standard fees. Bear in mind that the personal APR you receive may differ from the advertised representative APR.
The representative APR is designed to help you see the typical cost of a loan, but you’re not guaranteed to receive this rate. Only 51% of applicants who are approved for a loan will receive the advertised representative APR (or lower), so you could be charged more or less than this.
Pros and cons of personal loans
As with any time you take out credit, there are pros and cons to getting a personal loan.
Advantages of personal loans
- You can pay for goods or services upfront and spread the cost over a longer period.
- You can apply for a loan and often receive the money relatively quickly.
- You may be able to borrow money at a lower interest rate than some other options.
- Loan rates and monthly repayments are normally fixed, so the amount you pay each month won’t change.
Disadvantages of personal loans
- A personal loan can have a higher interest rate than some other finance options, especially if you have a less-than-perfect credit score.
- It may not be the best option if you want to borrow only a small sum of money (read more about alternatives to a personal loan).
- There’s a limit to how much you can borrow.
- Missed and late repayments can harm your credit score.
How much can I borrow with a personal loan?
You can typically borrow between £1,000 and £25,000 with an unsecured personal loan, but some lenders may offer larger loans.
Your credit score and financial situation will also determine how much you can borrow. If you have an excellent credit score and a higher income, you’re likely to be able to borrow more than someone with a poorer credit history and a lower income.
Even if you are eligible for a larger loan, you should only borrow the amount you need and that you can afford to repay. You can use our personal loan calculator to get an estimate of how much you can afford to borrow.
How to compare loans
Comparing loans from a range of lenders can improve your chances of finding the best loan for your requirements, at the lowest loan interest rates.
Some important points to look out for when you compare loans are:
- the loan amounts and terms available, for example a £5,000 loan or £10,000 loan
- the annual percentage rate (APR)
- how quickly you could get the loan in your account
- if there are any extra fees, or charges for early repayment
- whether the customer support available suits your situation (some lenders are online-only, for instance)
You should also check the eligibility criteria of each lender to make sure you meet their basic income and credit history requirements, for example.
With any loan, it’s best practice to only borrow what you need and pay it back as quickly as possible, based on what you can comfortably afford to repay each month. Paying the loan back over the shortest time possible costs less than paying it back over a longer time frame.
How to apply for a personal loan
You can apply for a personal loan online with many lenders. But before submitting a formal application, you can often check your eligibility with the lender first.
Checking your eligibility involves a soft credit check, which doesn’t affect your credit score, whereas applying for a loan usually involves a hard credit check. Hard searches are visible on your credit report and affect your credit score.
You can also use a loans eligibility service to do a soft search across multiple lenders to find out how likely it is you’ll be offered several different loans, without affecting your credit score. However, the lender’s final decision will only come when you apply for the loan.
When you apply, you will need to enter information such as your name, address, income and employment information to help lenders decide on your application.
The lender will also usually check your credit history to see if you have been a reliable borrower in the past.
» MORE: How to apply for a loan
Tim Leonard, Lead Writer and Loans Expert at NerdWallet
What our Nerds say…
“It’s a good idea to only apply for loans that you’re confident of getting, because making multiple credit applications in a short space of time can damage your credit score. You can feel confident by checking your eligibility before applying – checking your credit score also gives you an idea of how a lender may view your application.”
Alternatives to a personal loan
A personal loan isn’t the only option if you need to borrow money. Depending on your situation and your individual requirements, there are alternatives you could consider.
If you only need to borrow a small sum over a short period, a credit card could be worth considering. For example, using a 0% interest purchase credit card or balance transfer credit card may mean you can borrow money without paying any interest, as long as you pay off the card in full by the end of the 0% period and stick to the terms of your credit agreement.
If you’re struggling to get an unsecured loan or you want to borrow a larger amount, you could consider a secured loan. These loans use your property as security, which the lender can repossess if you don’t repay the loan. This reduces the risk for the lender, but you risk losing your property if you can’t make repayments.
A guarantor loan is a type of personal loan where a friend or family member agrees to act as guarantor and repay the loan if you don’t manage to. The guarantor can make it easier for someone to get accepted for a loan as the risk to the lender is reduced.
If you have a current account with an arranged overdraft and only need to borrow a small amount for a short time, this could be an alternative to taking out a loan. However, make sure you don’t go over your agreed overdraft limit or you could face high interest charges.
If you plan to take out a loan to buy a car, car finance may be an option. This is when the loan is secured against the vehicle and you make payments each month. There are several types of car finance available, including hire purchase (HP) and personal contract purchase (PCP).
If you’re considering borrowing from friends and family, only ask someone you trust and put the terms of the loan in writing to minimise the chances of disagreement later on.
By remortgaging and borrowing more than you currently owe, you can raise the money for home improvements, for example. However, this means you would owe more on your mortgage and you should consider any early repayment charges or other fees you may need to pay.
If you’re searching for a loan on benefits, your available options for borrowing are likely to be expensive. It’s important to make sure that you’re claiming all the financial help you’re entitled to first.
For example, are you claiming all the support with childcare costs you may be eligible for? And if you need money urgently, you may be eligible for an emergency loan or grant.
Services such as Citizens Advice, StepChange and Turn2us can give you free advice about what benefits you may qualify for and how to claim them.
Personal loan FAQs
You can use a personal loan to pay for a variety of different purposes, including:
- a new car
- home improvements
- holidays
- weddings or other special occasions
- large purchases, such as a new household appliance
- paying off and consolidating existing debt
Before taking out a personal loan to consolidate your debts, make sure you consider the costs involved. Using a personal loan with a low interest rate to pay off debt with a higher interest rate could save you money, but make sure you consider any early repayment fees and how much you would end up paying overall. Also consider when consolidating debts borrowers often extend the term of the loan. This can mean the loan costs you more overall.
You typically can’t use a personal loan for any business purposes, share dealing, gambling, or buying property, for example.
In most cases, comparing and checking your eligibility for loans won’t affect your credit score. Providers will typically run a soft credit check during this process, which doesn’t leave a mark on your credit history. But, before submitting any application, make sure you know exactly what checks the provider will do, as a hard credit check will be recorded on your credit file.
If your credit score is good and you have a stable income, getting a personal loan can be fairly straightforward. But if your score is less than perfect and you’re struggling to get a standard loan, there are specialist bad credit lenders that may consider your application. However, they are likely to charge a higher interest rate.
Alternatively, you could consider a guarantor loan or a secured loan. They may be easier to get approved for as the lender has the extra reassurance of the guarantor or the property or asset used as security. However, if you don’t repay these loans, the guarantor would need to step in or, if you have a secured loan, the lender could repossess your property. You should evaluate the full range of products available to figure out which one best meets your requirements.
There isn’t a specific credit score that you need to get for a personal loan. Lenders will have their own requirements and will base their decision on your income and overall financial situation, not your score alone. Some lenders will require you to have a good credit score to qualify for a loan, but other lenders may accept applications from people with less-than-perfect credit scores.
The best advertised personal loan rates are usually available to those with the best credit ratings. Lenders advertise rates as a representative APR, so your actual rate could be higher than this.
The interest rate you are charged on a loan will depend on your credit score, as well as the amount you borrow. Larger loans often come with a lower rate of interest, but this shouldn’t be a reason to borrow more than you need as the total cost of borrowing could be more.
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