Personal Loans

Personal loans are big business in the UK. People use them for a wide variety of different reasons whether they have a great credit score or whether they've had financial problems in the past.

On this page, Little Loans shares with you our quick guide on what we think you need to know about personal loans from loan calculators to maximum loan amounts to loan terms to "APR representative".

What is a personal loan?

A personal loan is a financial agreement between you and a lender. Your lender agrees to lend you a sum of money which you agree to repay plus interest in instalments (weekly or monthly) for a set period of time. Your loan term might be as little as one year or as many as 25 years. Traditionally, personal loans have been approved across a range of amounts between £1,000 and £25,000 although some lenders now will consider maximum loans of £35,000.

What is the difference between a secured personal loan and an unsecured personal loan?

There are two main types of personal loan - secured personal loans and unsecured personal loans.

Secured personal loans

Most of the time, a secured personal loan uses your primary residence as security on the loan. In other words, if you fail to make repayments on your loan or you find yourself unable to pay the loan back, your lender may attempt to repossess your home. When they sell your home, they use the proceeds of the sale to settle whatever balance you owe them.

Because these loans require you to pledge your home as security to be approved, they are only open to borrowers who own their own home.

Unsecured personal loans

Because these types of personal loan require no security to be offered by a borrower, the interest rates are normally higher. However, if you can't keep up your repayments or you default on your loan, your home can not be repossessed however they may wish to place a charging order on your property (if you have one).

You do not need to be a homeowner to apply for an unsecured personal loan.

What are the 10 main reasons why people take out personal loans?

You do not need to be a homeowner to apply for an unsecured personal loan.

What are the 10 main reasons why people take out personal loans?

The main reasons why people take out personal loans are

1. Buy a new car
2. Extend their property
3. Home improvements
4. Pay for a dream holiday
5. Debt consolidation
6. To buy something they really want
7. To pay for a wedding
8. Major family events
9. Home emergencies
10. Medical bills

Buy a new car

Millions of cars are bought and sold every year by Brits. Did you know that around two-and-a-half million new cars are registered with the DVLA every year which many of us queue up for every year to buy at the showrooms?

If you're in the market for a new car and you need a loan to help you buy it, be sure to compare the options available to you before you commit one way or the other.

Extend their property

Buying a house is far more expensive than it's ever been. As a result, more and more of us are choosing "to improve and not to move". Most of us love where we live and the idea of moving somewhere else and disrupting the kids' education is too much to bear, let alone the costs of finding and purchasing a new home.

An extension adds a lot more breathing space for us and our families as they grow. It's a great investment too in the long run for when you do sell as an extension might add up to 23% to the value of your home.

Other than creating more space for ourselves and our families, what other types of home improvement do personal loans fund? 22% of us choose a new kitchen with garden makeovers, new bathrooms, loft conversions, double glazing, and conservatories not far behind.

Pay for a (dream) holiday

Holidays are expensive. Dream holidays are even more expensive especially if you have the kids in tow. Did you know that, according to the Association of British Travel Agents (ABTA), we spend £532 on a holiday before we've even stepped into an airport?

According to Money Advice Service, 800,000 of us plan to borrow money to fund our holidays each year when our savings don't quite meet the budget our holiday demands.

Debt consolidation

Most of us have a number of different types of credit account - bank loans, credit cards, overdrafts, and so on. In 2017, average UK household debt was £13,000, equivalent to 27.4% of household income - a record for our country.

Because that debt is spread over a number of different accounts, you'll be paying different rates of interest. On credit cards, the debt could go on for years. If you have £3,000 on one of your credit cards at an interest rate of 17.9% and you make the minimum repayment of the higher of 1% of your balance plus interest or £5 (whichever is greater), it would take you 27 years and 4 months to pay it off at a cost of around £4,000 in interest charges. A credit card will cost you a lot of money if you only ever make the minimum monthly repayments.

With a debt consolidation loan, you pay off all your existing credit accounts in one go. You then make one repayment every month for a fixed period of time and, at the end of the term, you've cleared your debts. If the interest rate on your consolidation loan is lower than the interest rates on your current credit accounts, you'll end up paying less to become debt-free.

If you are considering taking out a consolidation loan, please be careful to make sure that the interest rate you pay and the length of time you borrow for means you actually do save money.

To buy something they really want

We work hard for our money and, sometimes, we just see something we really want that, even if we do save money, we just haven't budgeted for. For some, it's an enormous TV. For others, it might be a high-end gaming computer. Some handbags cost thousands of pounds.

To pay for a wedding

The happiest day of our lives - and undoubtably probably the most expensive party we'll ever throw. Weddingday.co.uk puts the average cost of a wedding at £18,500 but Hitched.co.uk disagrees - they quote the average wedding as costing over £32,000.

Saving is difficult - we know. For the three in four of us who do save, we manage to put aside just £171 a month on average. It would take just over 9 years saving £171 a month to raise the £18,500 Weddingday believes the average cost of a big day is.

Many Brits top up their savings with a personal loan to help pay for the day they dream of.

Major family events

Weddings aren't the only family event which stretch our finances. When a new baby arrives, it's not just the upheaval to our lifestyles we have to prepare ourselves for - there's also the cost too.

Many Brits also take out loans to cover funerals which now cost from £3,500. Money shouldn't be something we have to worry about during times like these but, unfortunately, if a relative dies without funeral cover, the burden falls on their family to pay for it.

Home moving costs

The costs of moving home seem to spiral each year. Not only are homes more expensive meaning more of us are having to pay Stamp Duty Land Tax but there are also conveyancing fees, Energy Performance Certificates, insurance, estate agent fees, home removal costs, mortgage valuations, and property surveyors to pay for.

Medical bills

Thankfully, we live in a country with the amazing National Health Service to look after us when we're poorly. However, not every medical procedure is covered by the NHS. 28,000 of us chose to undergo cosmetic surgery in 2018 and, with prices often running into five figures, many Brits chose a personal loan to pay for their procedures.

5 things you need to do to apply for a personal loan

If you've made the decision to start applying for personal loan, there are five things you should consider before committing yourself to one lender:

1. Decide how much you want to borrow
2. Choose a lender or broker to apply to and fill in the application form
3. Understand the interest and the charges
4. Read the terms and conditions
5. Sign the loan document

Decide how much you want to borrow

Never borrow more money than you actually need to borrow to pay for what you want to pay for. Every additional £1 you take out when you borrow money attracts interest you have to pay back.

If you have savings, could you divert some of those savings so that you don't have to borrow as much? Remember that, in most cases, the interest you pay on a loan will be greater than the interest you're paid on your savings or investments.

Choose a lender or broker to apply to and fill in the application form

There are two ways to apply for a personal loan - either direct through a lender or via a broker. Most lenders and brokers allow you to apply online on any connected device including from your mobile phone.

No matter the choice you make, the lender you ultimately apply through (either directly or through a broker) will check your eligibility by reviewing your credit history and by running an affordability assessment.

If you apply direct to a lender, remember that they're only ever going to present you with their own financial products.

One question often asked is "Do I have to apply to a bank for a personal loan?" A better question to ask might be "What bank is easiest to get a personal loan from?"

You may get a cheaper personal loan offer from your bank because they have all of your financial details going back from the time you opened your account with them. They will know from your bank statements that you can afford the loan based upon how you conduct your day to day banking.

If you apply direct to a lender you have no current relationship with, again you'll only be presented with their products. And because they won't really know much about you other than your credit history and the information you share on your application form, you're unlikely to benefit from a discount on the interest rate.

Once you've completed a lender's full application form, they will then run a hard credit check on you. Hard credit searches stay on your file for twelve months and other lenders can see them.

The lender will consider your credit score and the information you shared with them to check if you're eligible for borrowing. Normally, within a few seconds, you'll either be made an offer or your application will be rejected.

How working with a broker might give you an advantage

Brokers are different. Brokers work with a panel of lenders regulated by the Financial Conduct Authority. When you contact a broker, they'll ask you to complete an application form but the way they use it is rather different from the way that direct lenders do.

When you've filled in your form, they'll take your details and use them to match you to one or more lenders likely to be happy to lend you the money you need. This all happens automatically - within seconds of pressing the "submit" button on your screen, your broker will send off your details to the selected lenders.

The lenders make their initial assessment on your application in turn. You'll be then re-directed automatically to the first lender who replies indicating that they might approve your application.

When you're there, fill in the lender's full application form. They'll then run a hard credit check on you and get back to you with their final answer.

Number of hard searches and why that's important

So, by using a broker, your application is sent to multiple lenders but only one hard credit search is performed and that’s only if you decide to proceed with that lender.

If you apply direct at multiple different lenders' websites, each lender will run a hard credit search on you.

Did you know that one important factor determining whether you're eligible for a loan is the number of recent hard searches run on you?

The reason for that is that, the more hard searches a lender sees, the more lenders may think that you're desperate for money or that you can't manage your finances without having to borrow money.

Understand the interest and the charges

When you take out any form of borrowing, you'll pay interest on the amount of money you borrow. You may also have to pay additional charges if you are late in making your repayments or you're unable to pay the loan back.

Before you agree to any personal loan, make sure that you read and understand:

• the interest rate you're being charged,
• how much you'll be paying back each month, and
• what fees (if any) you'll be levied if you're unable to meet your schedule of repayments.

Read the terms and conditions

If you're eligible for a personal loan and your request has been approved by a lender, you'll also be shown the terms and conditions attached to the loan. The terms and conditions set out your responsibilities to your lender, your lender's responsibilities to you, and what happens if things go wrong.

Sign the loan document online

If you agree to take out the loan, a new legal contract will be formed between you and the lender. If you're happy to proceed and you're certain that you can comfortably afford each monthly repayment throughout the term of the loan, sign the loan document online.

4 things to know when you've got your personal loan

Within 15 minutes* of signing your online agreement with your lender, you may receive your money paid direct into your bank account. Here are 4 things you need to know when you've received your personal loan.

1. Keep to your repayment schedule
2. If you fall into hardship
3. Let the lender know if your circumstances change
4. Tell the lender if you move home

Keep to your repayment schedule

As a customer of your finance company, you have entered an agreement to make all repayments in full to the schedule you've agreed. Please make sure that you do everything possible to stick to that schedule.

If you fall into hardship

From time to time, a finance company customer may, for example, lose their job or fall ill which stops them from going into work.

If you know that you are going to struggle to meet your next repayment (and any further repayments after that), please get in touch immediately with your lender to discuss your options. The person you speak with will log your call and then you’ll likely be put in touch with someone on your lender’s specialist customer help teams.

Let the lender know if your personal circumstances change

If your personal circumstances change and your lender requires you to inform them of any changes, please get in touch with one of their customer service representatives straight away.

Tell the lender if you move home

If you move home, change your telephone number, or get a new email address, make sure you contact customer services to tell them so that they know how to contact you.

Your A-Z of personal loans

What are some of the most widely used jargon words in personal loans?

• Affordability
• Annual Percentage Rate (APR)
• Credit rating
• Early repayment charge
• Financial Conduct Authority
• Interest rate
• Loan agreement
• Loan amount
• Loan application
• Loans calculator
• Overpayments
• Repayment holiday
• Term (loan term)
• Total amount repayable

Affordability

Affordability is whether you can service you borrowing comfortably by meeting your repayment schedule without causing yourself hardship.

Annual Percentage Rate (APR)

APR is the official rate showing borrowers how much a financial product offered will cost them over one year. All lenders must use the same method of APR calculation even if the term of their loans is less than one year. Representative APR describes the APR offered to 51% or more of a lender's customer. APR is a tool for borrowers to compare the cost of finance.

Credit rating

Your credit rating is an important factor in determining whether your borrowing application will be approved and you receive an offer. Your credit rating is calculated by credit reference agencies - the companies which maintain and update your credit history report. Your access to some types of finance may be limited by your credit score. To find out more about online tools available to help you repair your credit score, please click here.

Early repayment charge

Some lenders offer you the opportunity to settle your loan account in full before the end of the life of the loan - some may charge for this though.

Interest rate

Interest is the fee that you're charged on the money your borrow. The interest rate you pay is decided by evaluating your personal circumstances and your credit rating. The interest rate affects the size of your monthly payments and the total amount repayable.

Loan agreement

Your loan agreement is the legal contract that you and the lender enter when you agree to the terms and conditions.

Loan amount

The amount of money you borrow - generally from £1,000 to £25,000 although £35,000 loans may be offered depending on your financial circumstances.

Loan application

A loan application form is what you use to share your personal and financial details with lenders so that they can make a decision on whether they'll offer you a loan.

Loans calculators

A loan calculator allow you to work out the cost of a loan based on the amount you borrow over how long and at what interest rate.

Loan repayments

The amount you agree to repay each month to your lender.

Overpayments

Some lenders allow you to make overpayments on your loan to bring the balance down quicker. There may or may not be a charge for this.

Repayment holiday

Some lenders allow you to take a break from monthly payments for a short period. Interest on your loan will continue to accrue during these repayment holidays.

Term (loan term)

Term" is the length of time you agree to pay a loan back over - for example, 3 months, 2 years, 5 years.

Total amount repayable

This is the total amount you repay your lender including interest, fees, and other charges.

What is the best personal loan?

The best loan a lender can offer you is one which is for the amount of money you need and at a price you can comfortably afford. Compare what the monthly payments are with how much free cash you have at the end of a typical month to determine whether:

• it's affordable and
• if you should accept the offer and enter into the loan agreement.

Is it a good idea to get a personal loan?

Whether you want to borrow £1,000 or £25,000 or more, make sure you compare current offers to get an idea of what's a competitive rate before you commit to any lender or broker.

Should I take out a loan if I have a lot of debt already?

If you're currently in debt and you're concerned about how manageable the debt is that you're in, you may wish to consider contacting one of the following organisations for free help, guidance, and support - StepChange, PayPlan, National Debtline, the Debt Advice Foundation, the Money Advice Service, and Citizens Advice.

How can I get a personal loan fast?

To apply for a personal loan through Little Loans, please click here.