Rhiannon Philps
Sam Bromley
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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 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.
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Applying for a loan: eight steps
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.
Even if you’re eligible to borrow a more significant sum, you should only borrow the amount of money that you need. If you get a bigger loan, just because you can, you would be taking on debt you don’t need and likely paying more interest as a result.
The amount you can borrow will depend on the lender, your credit history and your current financial situation.
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. For a full report, including your credit score, you may have to pay a subscription fee, though some platforms 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
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 loans. Comparing loans and lenders is a simple way to help you find the most suitable loan for your situation.
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.
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 lenders.
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.
Improving your chances of getting a loan
If you are concerned your application might be rejected, or you’ve struggled to secure credit in the past, these steps could help improve your chances of getting a loan.
1. Correct any mistakes on your credit report
A poor credit history is a common reason why a lender might reject your loan application. This is because it suggests you may not manage credit arrangements well.
The good news is that it is possible to improve your credit score. The first step is to check that there are no mistakes on your credit report that could be affecting your score.
Paying bills and making other payments on time while reducing any debt you may have can help build a score that shows you are reliable when it comes to managing debt.
Typically, the higher your credit score, the more likely your loan application is to be accepted, and the better terms you’ll receive. Although other factors will come into the decision making process, such as your income and the affordability of the loan itself, loan providers often reserve their best deals for those with excellent credit ratings.
2. Review outstanding credit
Outstanding credit could affect your chances of getting a loan.
Lenders may be wary about lending you more money if you have several open forms of credit, as they may think there’s a higher risk that you won’t be able to repay the loan.
However, having open forms of credit won’t necessarily stop you from getting a loan. It will depend on the individual lender, how you have managed your credit commitments, how much of your available credit you are using, and whether the lender thinks you can afford to take on more credit.
If you’re using most of the credit you have available, this could send a warning sign to a lender. For example, if you’ve used £1,500 on a credit card with a £2,000 limit, your credit utilisation rate is 75%. Lenders are likely to look more favourably at those with a lower utilisation rate.
As a general rule, credit reference agencies recommend that you aim to keep your credit utilisation rate at 30% or below.
3. Space out loan applications
If you are rejected for a loan, think carefully before you make another application. The more hard credit checks a lender sees on your file over a short time, the more wary they are likely to be about lending to you. Your desire for credit will send a red flag to lenders about your ability to manage your finances responsibly.
» MORE: What to do if you are rejected for a loan
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