How To Apply For A Personal Loan – a Step by Step Guide

You could use the credit from a personal loan to fund a big purchase like a new car, to pay for a holiday or to consolidate your debts and improve your financial position. Here, we explain how to apply for a personal loan.

John Ellmore, Joel Kempson Last updated on 28 April 2022.
How To Apply For A Personal Loan – a Step by Step Guide

A personal loan can help you spread the cost of big purchases – a dream holiday or a new car, for instance – or to pay for costly home improvement work. And while borrowing is always a big commitment, taking certain steps on your loan journey can help make sure you are in a strong position to pay off your debt on time, avoiding unnecessary stress as well as a dent in your credit history.

A personal loan is also referred to as an unsecured loan, because the funds lent to a borrower by the lender are not ‘secured’ or backed up by an asset, such as a house or high-value item. Personal loans work in the same way as most other forms of borrowing. You’ll receive a lump sum of cash and agree to repay the borrowed amount over a fixed period of time in pre-agreed monthly repayments. Each month, lenders will charge you interest on the outstanding balance, with interest calculated as a percentage of the amount you’ve borrowed.

Once you’ve decided that a personal loan is the right option for you, you’ll need to work out how much you can afford to borrow and for how long, and check your eligibility so that the application process runs smoothly.

Read on to see our seven steps to help you apply for a personal loan.

Step 1: Work out how much you need to borrow

Before you start comparing and applying for loans, be sure to calculate how much you need to borrow. Shop around to find the best deal for what you are looking to buy (if you’re not taking out a loan for other reasons), as you might find you need a smaller loan than you first thought.

Just because you can borrow more, doesn’t mean you should as you’ll end up paying more interest in the long term. Not only should you only borrow what you need, it is important to work out how much much you can afford to repay each month so you can calculate how long you’ll need the loan for.

You can use a personal loan calculator to see what your monthly repayments will be over different time frames. You will usually need to key in the amount you want to borrow, and the annual percentage rate (APR) – that is how much the loan will cost you once the interest rate and any fees are calculated.

» MORE: Calculate how much you can afford to borrow

The amount you can borrow will depend on the lender, your credit history and your current financial situation. You might see a loan advertised with a high upper limit, such as £25,000, but there is no guarantee that you will be offered that amount. Not only will you have to meet the lender’s eligibility criteria, you’ll also need to prove you can afford the monthly repayments.

Personal loans typically range from £500 to £40,000, though it can differ vastly from lender to lender.

If you are looking for a larger sum, you may find higher amounts are available with secured loans, where your assets, usually a property, act as security for the value of the loan.

» MORE: Learn about secured loans

Step 2: Calculate how long you will need to pay off your loan

The cheapest way to borrow money is typically to pay off your debt as soon as possible. The longer your loan term, the more time there is for the interest on your debt to build up. So the shortest term is likely to involve the lowest overall cost.

There are exceptions though, as some short-term loans come with a very high APR. Some lenders will also charge you fees for paying back your loan too soon, so it is important to check if there may be a chance you’ll want to repay your loan ahead of time.

Calculating how much you can afford to repay each month can help you understand how many months you will need to clear your debt.

Step 3: Check your credit report

When you apply for a loan, a prospective lender will run a ‘hard’ credit check, which will be recorded on your file. Multiple hard checks can affect your credit score, so it is important to find out your credit score before you apply.

The three main credit reference agencies in the UK – Experian, Equifax and TransUnion – can all provide you with a free statutory credit report. For a full report, including your credit score, you may have to pay a subscription fee, though there are some platforms that do offer this for free.

If your credit rating is less than ideal, there are several ways to improve your credit score, to give you the best chance of being accepted for your loan when you do apply.

» MORE: What is a credit score?

Step 4: Check eligibility and compare

Once you’ve worked out how much you need to borrow and how long it would take you to repay it, it’s time to compare loans. Comparing lenders is a simple way to make sure you are getting a good deal. The best loan for you will not necessarily come from your bank, so using a comparison tool can help you match up with the right lender.

NerdWallet’s comparison table allows you to compare the pertinent details offered by each provider, including representative APR, available loan amounts and minimum to maximum possible loan terms.

It can also be a good idea to find out if you are likely to be eligible for a loan by clicking check eligibility. This can save you from being rejected directly by a lender and give you a good understanding of what sort of credit will be available to you.

Checking your eligibility is known as a ‘soft’ check, meaning it won’t leave a mark on your credit file.

» COMPARE: Personal loan deals

Step 5: Gather loan documents

To apply for a personal loan you will need to provide certain identification documents and proof of address.

  • proof of identity – passport, photocard driving licence
  • proof of address – utility bill (electricity, gas, landline phone bill less than three months old)

You may also need to show documentation that proves how much you earn and that you have the right to work in the UK.

Having this paperwork ready when you apply for your loan can speed up and simplify the process, as well as cutting down the possible reasons for your application being delayed.

Step 6: Submit your application

The application process will vary slightly from lender to lender, but most involve the same basic process.

Once you have decided on the right lender for you, the next step is to complete your online application. At this stage you will be asked how much you want to borrow, how long you need the repayment period to be and what your reason for borrowing is.

You will then need to give personal information including your name, address, and employment details. You will also be asked for details of your main outgoings, such as rent or mortgage costs, and how much you spend on existing credit repayments.

Most lenders will then require the details of a UK bank account to pay the loan amount into.

Step 7: Get your money and start paying it back

After you have applied for a loan with your chosen lender and passed its credit check, you will be offered an interest rate and sent a loan agreement. This might be online or through the post, and once you sign and return it you should get your money within days.

To repay the loan, you will need to make fixed monthly payments to your lender by direct debit from a UK bank account. If you do not miss any payments, your loan will be paid off in the time you have agreed with your lender.

If your financial situation changes and you would like to pay off your loan early, some lenders will allow you to make overpayments but may charge a fee. Any early repayment charges will be set out in your loan agreement. You may be able to overpay over the phone or by cheque, as well as by electronic transfer from your bank. It can also be worth checking again with your lender before proceeding with any overpayments to ensure you are fully aware of any possible limits and the charges for exceeding these.

» MORE: Paying off a loan early

How to have a successful loan application

If you are concerned your application might be rejected, or have struggled to secure credit in the past, there are steps you can take to make it more likely that you will be approved for a loan.

You may find that simple changes can make a big difference to your credit profile. If more significant changes are required, the sooner you can make a start the sooner you will see the impact.

» MORE: Tips for a successful loan application

About the authors:

John Ellmore is a director of NerdWallet UK and is a company spokesperson for consumer finance issues. John is committed to providing clear, accurate and transparent financial information. Read more

Joel Kempson is a personal finance expert and writer at NerdWallet. He has previously written for Money.co.uk and Uswitch, as well as being quoted in the Daily Express, The Mirror and The Sun. Read more

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