Rhiannon Philps
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 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 considering if there are any alternatives to a loan that could be better for your situation.
If you have decided that a personal loan is the right choice, 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 eight steps to help you apply for a personal loan.
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 the item or service you are looking to buy, 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.
You should only borrow the amount of money that you need to avoid taking on unnecessary debt and paying more interest than you need to. Having a clear budget worked out can help you understand where your money will be spent.
The amount you can borrow will depend on the lender, your credit history and your current financial situation.
Calculate how long you will need to pay off your loan
Not only should you only borrow what you need, it is also 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 short-term loans 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.
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: How to check your credit score
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 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 details between providers, including representative APR, available loan amounts and possible loan terms.
Check your eligibility
It can also be a good idea to find out if you are likely to be eligible for a loan before applying. This can save you from being rejected directly by a lender, and can give you a good understanding of what sort of credit will be available to you.
Firstly, make sure you look at the basic criteria of a lender to ensure you meet their minimum requirements. For example, lenders may set age or income requirements and some may not accept applications if you have a bad credit score.
Many lenders will also allow you to check your eligibility for a loan. 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 would 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 the reasons why you were declined and work to address them 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 for as the guarantor reduces the risk for the lender.
Get your documents ready
To apply for a personal loan, you may need to provide certain identification documents to act as evidence.
- proof of identity – passport, photocard driving licence
- proof of address – 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 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.
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 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.
Sign your 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 or through the post, and 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 this may vary depending on which you choose.
To repay the loan, you will need to make fixed monthly payments to your lender by direct debit from a UK bank account. This is often set up as part of the loan application form. If you do not miss any payments, your loan will be paid off in the time you have agreed with your lender.
How to improve your chances of approval
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.
For example, you could aim to improve your credit score by making payments on time and paying off any outstanding debt.
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
Image source: Getty Images
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