Am I eligible for a personal loan?
A personal loan, where you borrow a set amount of money and repay it over a specified period of time, can be a very useful financial tool. But how do you go about applying for a loan and how likely is it you will get one?
In order to get a personal loan there are certain requirements that you need to meet by law. These dictate that you must be over 18 years old and be a resident of the UK.
You will be asked to prove your age and place of residence by supplying documents such as a driving licence, passport and recent utility bills.
However, lenders will have their own criteria too. A high street bank for example, may also insist that you bank with it before it grants you a personal loan.
Lenders will also use a credit score to evaluate the risk involved in providing you with a loan. This credit score will determine whether you’re eligible for a loan, how much you can borrow and the interest rate you’ll pay. The higher the credit score, the more likely you are to be offered a loan and the lower the rate of interest will be.
Lenders use the services of three credit reference agencies in the UK: Experian, Equifax and TransUnion. These agencies use publicly available information to give you a credit score. They look at data such as:
- How long you’ve lived at your current address.
- Whether you’ve been declared bankrupt or had problems repaying loans or meeting card payments in the past.
If you’re refused a loan, you have the right to approach the appropriate credit reference agency and ask for any information which is incorrect to be amended.
Even if you’re turned down for a personal loan, you may still be able to borrow money if you can get someone to guarantee the loan. The guarantor will promise to repay the loan if you’re unable to do so.
» MORE: How to get a guarantor loan
Can I check my loan eligibility before applying?
It is possible to determine how likely any personal loan application is to succeed before you apply.
Before applying for any credit it is worth checking your credit report. You can do this free of charge by applying to each of the main credit referencing agencies and they can either post or email you your credit report.
The information required will include details of all your credit accounts, any financial links you have with other people as well as any missed payments, county court judgments, individual voluntary arrangements (IVAs) or bankruptcies.
Your credit score will determine your loan eligibility. The credit reference agency Experian, for example, gives each person a score between 0 and 999, and although you should check up to date information it currently ranks the scores as follows:
|Rating||Score out of 100|
|Fair or average||721-880|
Each lender has its own requirements in terms of credit score. So, although one lender may turn you down, another might offer you a loan.
However, each time you apply for a loan, a mark is left on your credit record, and if lenders see too many applications over a short period they may suspect you are struggling financially, or trying to borrow more than you can afford.
To avoid this risk it is worth using a free eligibility checker. This runs a ‘soft’ search on your credit record and is able to give you an indication of which loans you are likely to be eligible for without you making a formal application.
As long as you’ve repaid previous debt on time and haven’t experienced other significant financial difficulties, it’s likely that you’ll be eligible for a personal loan.
Is a personal loan a good idea?
The advantages and disadvantages of borrowing money via a personal loan (rather than a credit card, for example) include:
- The cost of borrowing may be lower.
- You may be able to borrow relatively large amounts for longer periods.
- You will be able to borrow money at a set interest rate, so you’ll know exactly how much you have to repay each month over the term of the loan.
- There may be cheaper ways of borrowing. Other options include borrowing from a relative or friend, using your credit card (for short-term needs)
- Personal loans tend not to be available for amounts under £1000 or for periods of less than 12 months.
Personal loans are unsecured loans because you don’t need to register any assets, such as your house or car as collateral, with the lender. Secured loans, by contrast, allow the lender to take possession of the borrower’s assets if the loan isn’t repaid.
» MORE: Unsecured v secured loans
Short- or long-term loans?
You can usually borrow money for up to 10 years. The longer the term, the lower the monthly repayment – but the higher the overall cost of the loan will be. If you can, you should aim to repay the loan as quickly as possible.
Do I really need a loan?
Before you take out a personal loan, you should always ask yourself if it’s really necessary. Remember, you’re committing to repay a loan over a number of years, and during that time. your personal and financial circumstances may change.
In addition, you need to be certain that you’ll be able to pay the money back. You might also consider how you would meet the repayments if you lost your job. You might be able to take out insurance to cover that eventuality, but it will add to the cost of the loan.
» MORE: Estimate the cost of a loan
If you’re already struggling to meet your existing financial obligations, such as a mortgage or rent, then taking out a personal loan is almost certainly a bad idea.
Good reasons to take out a loan could include purchasing essential goods, such as a car you need for work, or to improve your house with a new bathroom or kitchen, which will add value to the property.
It may also make sense to take out a personal loan to consolidate other, more expensive debts and repay just one loan with one monthly payment at a fixed rate. Be wary that consolidating debts could be more expensive in the long run, if it’s used to lower your monthly repayments. Alternatively, you may require a loan for medical treatment or to pay for an important family event such as a wedding.
There may be restrictions on what you can use a personal loan for and each financial institution will vary. For example, most won’t allow you to use a personal loan for business purposes, investments (including buying stocks and shares), timeshares, purchasing property (including as a deposit for a mortgage), gambling-related expenses, or any illegal purposes.
» COMPARE: Personal loan rates and deals
Image source: Getty Images
Anthony is a BBC-trained journalist. He has worked in financial services and specialised in investments for over 20 years, writing for various wealth managers and leading news titles. Read more