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. But how do you get a personal loan?
But before applying for a loan, you should always make sure it’s the right option for you and that you can afford to repay it. It’s also worth shopping around to get the best personal loan you can and considering the alternatives to getting a loan that could be better for your situation.
If you decide to take out a personal loan, there are some steps you could follow to help you find the right lender and make the application process as smooth as possible. Find out how to apply for a loan below.
8 steps to apply for a loan
1. Work out how much you need to borrow
Before you start comparing and applying for loans, work out how much you need to borrow – and whether you need a loan at all. If you can afford what you want to buy without borrowing money, it might be better to do so in the long run. If you can’t afford something up front, work out how long it will take you to save up what you need.
If you decide to take out a loan, make sure you shop around to find the best deal for the item or service you are planning to use the loan for, as you may not need to borrow as much as you first thought.
The amount you can borrow will depend on the lender, your credit history and your current financial situation. It’s important to look for the cheapest deals – the loan rate you get can make a big difference to your monthly repayments and total repaid.
Tim Leonard, Lead Writer at NerdWallet
What our Nerds say…
“Even if you’re eligible to borrow a large amount of money, you should only borrow what you need. If you get a bigger loan, just because you can, you will be taking on debt you don’t need and likely paying more interest as a result, risking financial hardship if your circumstances change.”
2. Calculate how long you will need to pay off your loan
It’s important to work out how much you can afford to repay each month. This will help you work out how long it could take to repay the loan, as well as what repayment term might be best for you.
Typically, the cheapest way to borrow money is to pay off 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 loans with short terms come with a very high interest rate.
You can use a personal loan calculator to see what your monthly repayments will be over different time frames. You will usually need to enter the amount you want to borrow, and the annual percentage rate (APR), which estimates how much the loan will likely cost you once the interest rate and any fees are calculated.
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’s important to only apply for a loan if you’re confident of being accepted. Checking your credit score before an application can help to make sure you only apply for a suitable loan and allows you to spot and correct any problems that may be dragging your score down.
The three main credit reference agencies in the UK – Experian, Equifax and TransUnion – can all provide you with a free statutory credit report. You may have to pay a subscription fee to get your credit score from a credit reference agency, though some platforms do offer this for free, such as ClearScore.
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 credit score do I need for a loan?
4. Compare loans
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 personal loans. Comparing loans and lenders is a simple way to help you find the most suitable loan for your situation, considering factors like interest rates, available terms and the time it takes to receive your loan.
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.
These services compare loans from multiple lenders, so they can be a quick way to see the range of loans that may be available to you. Consider using tools from different providers as each one may compare different lenders.
5. Check your eligibility
It’s a good idea to find out if you are likely to be eligible for a loan before applying. This can give you a good understanding of what sort of credit will be available to you. It also means you’re less likely to apply for an unsuitable loan and have your application rejected.
First, check the lender’s basic eligibility criteria to ensure you meet its minimum requirements. For example, lenders may set age or income requirements and some may not accept applications if you have a bad credit score. Some lenders offer loans for bad credit but these will usually be limited to smaller amounts and come with higher interest rates.
Many lenders also allow you to check your eligibility for a loan, without affecting your credit score. Plus there are eligibility services that can check your eligibility for multiple loans with different lender
You will need to fill in some details about yourself and the loan you want to take out, which the lender will use to determine how likely it is that you will be accepted.
Lenders will run a soft credit check as part of this process. This won’t leave a mark on your credit file.
Bear in mind that even if the checker shows you are eligible for a loan, lenders will still need to run a hard credit check before approving a loan application. But, as long as the information you provided in the eligibility checker is accurate, you are likely to be approved.
If you’re not eligible for a loan, you should consider why you were declined and work to address it before applying again.
You may also want to consider other forms of credit, such as a guarantor loan, which could be easier for you to get accepted as having a guarantor reduces the risk for the lender.
6. Get your documents ready
To apply for a personal loan, you may need to provide certain identification documents to act as evidence, including:
- proof of identity – passport, photocard driving licence
- proof of address – a utility bill (electricity, gas, landline phone bill less than three months old)
- proof of income – recent payslips, bank statements, self-assessment tax return
You may also need to show documentation that proves you have the right to live and work in the UK.
Having this paperwork ready when you apply for your loan can speed up and simplify the process, as well as cut down the possible reasons for your application being delayed.
7. Submit your loan 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 also need to provide the lender with your personal and financial information, including your:
- name
- address
- contact details
- employment status
- income
- main outgoings, such as rent or mortgage costs, and how much you spend on any existing credit repayments.
Most lenders will then require the details of a UK bank account to transfer the loan amount to you.
Lenders will run a hard credit check as part of the application process. This check will be recorded on your credit history and will be visible to other lenders.
8. Sign your loan agreement
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, through the post or in-branch. Once you sign and return the agreement, you could get your money within days, or even on the same day. Different lenders work in different ways, so timescales may vary depending on which you choose.
» COMPARE: Best personal loans
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