If you’re looking to fund a big purchase, such as a holiday, a new car, a wedding or home improvements, you may be considering a personal loan.
This can also be an attractive option if you’re looking to consolidate debts such as credit cards and store cards into one place with one lender. This reduces one part of your ‘life admin’ and can mean you pay less interest if you pick the right deal.
With a personal loan, you can borrow a fixed sum over a fixed period of time at a fixed rate of interest.
As you’ll know at the outset exactly how much you have to pay back each month – and for how long – this can be a good way to spread the cost of a major expense. It can also be a good way to budget.
Unlike a secured loan, where you are required you to use an asset such as your home as security, a personal loan is ‘unsecured,’ meaning you don’t have to put up an asset to back your borrowing.
But if you want to take out a personal loan, just how much can you borrow?
How much can I borrow?
Typically, with a personal loan, you can borrow between £5,000 and £15,000, although with some lenders you may be able to borrow as much as £25,000 or
as little as £1,000.
You can usually choose to repay a personal loan over a period of one to seven years. For bigger loans of £25,000 longer repayment periods may be on offer.
Should I opt for a longer loan term?
A longer repayment period may sound appealing, as this will mean lower monthly repayments. But don’t forget this means you will be paying interest for longer – and so will increase the overall cost of your loan.
The best approach is to work out what you can realistically afford to pay each month, and then to borrow over the shortest possible period. Many lenders offer a loan calculator, where you can type in the amount you want to borrow, and the tool will show typical repayment costs over different periods.
What sort of rate could I expect to pay?
You may be able to find personal loans with a very competitive annual percentage rate (APR). Indeed, the rates on offer at the moment are among the lowest ever.
Generally speaking, rates on loans for amounts between £7,500 and £15,000 are the lowest. For example, for a loan of £10,000 over five years, you may be able to find rates below 3%.
The key is to do your research and compare rates carefully. We have an Eligibility Checker which harmlessly looks at your credit file (called a ‘soft search’) to work out how your financial profile matches what the lenders on our panel are looking for in new customers.
We can then tell you how likely you are to be accepted for particular deals without you actually having to apply, so that you can make an informed choice.
If a lender sees you have been making lots of applications in quick succession, this may sound the alarm bells, as it can appear that you are desperate for cash. This may mean they decide not to offer you a loan.
How much should I borrow?
Given that smaller loans tend to come with higher rates than larger loans, you may be tempted to borrow more – or take out the biggest loan possible. But be warned, for loans above £15,000, rates may be higher because the potential loss to the lender is so much greater.
Equally, you should never borrow more than you can comfortably afford to repay each month. If you miss payments, this will be noted down on your credit file, and this could make it more difficult to access cards, loans and other forms of borrowing in the future.
A loan is a big commitment, and not a decision to enter into lightly. All loans will need to be repaid – in full – eventually.
Am I guaranteed to get the rate advertised?
While headline rates on personal loans can look very attractive, you need to be aware that the very best rates are often only accessible for borrowers with the strongest credit scores.
In fact, legally, lenders only have to give the advertised APR to just 51% of people who apply. Those who fall into the remaining 49%, may get a higher rate.
How to take out a personal loan
The best way to find a personal loan is by comparing rates on our loans channel.
With some loans, you may need to specify what you want the money for. This may mean stating that you want the cash to fund a wedding, carry out home improvements, buy a car – or to consolidate debts, say.
Even if this is the case, once you’ve been accepted, the personal loan will work the same way, no matter what you use it for.
Check the T&Cs
When comparing loans, find out if there is a penalty for paying the loan in full before the end of the term. Early repayment charges can be equivalent to around one or two months’ interest. Also check if there is a charge for late or missed payments.
In some cases, there could even be an arrangement fee for setting up the loan. This should be reflected in the APR. Always read the small print!
How quickly will I get the money?
Once you’ve found a personal loan with affordable monthly repayments – and with terms you are happy with – you can apply online. If your application is successful, the money could potentially be in your bank account the next day – or within just a few days.
Improve your credit score
If you’ve got blemishes on your credit file which are preventing you from getting access to the best personal rates, take steps to boost your score. Simple tips include getting registered on the electoral roll, paying bills on time, and getting any errors on your credit report corrected.
Consider the alternatives
As rates can be much higher for loans below £7,500, if you only need to borrow a smaller amount, it’s worth weighing up other types of borrowing, such as a 0% credit card or an overdraft. The key is to do the maths to find the best option for your needs.