Personal Loans

In the event of a financial emergency, you might have thought about taking out a personal loan.

In this article, Little Loans shares some insights into personal loans to help you decide if they are the right borrowing option for you and your circumstances. This guide will cover the essential points you will want to consider, such as deciding how much you need to borrow and for how long, how a loan calculator could help you, as well as the important information you should look out for before deciding whether to make an application.

What is a personal loan?

A personal loan is a financial agreement between you and a lender. You borrow an amount of money which you agree to pay back with interest in monthly instalments over a set period of time. A personal loan could be an option if you’re looking to borrow between £100 and £25,000. Some banks offer personal loans of up to £50,000 for existing customers.

Little Loans can search for loans from £100 up to £10,000 with loan terms starting at three months. Depending on the loan amount, you may be able to spread your repayments in instalments up to 60 months.

What’s 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. Let’s look at the difference between the two.

Secured personal loans

Usually, a secured personal loan uses your home as security on the loan. This means you will need to be a homeowner to apply.

If you fail to make repayments on your secured loan, the lender is within their rights to attempt to repossess your home. The money gained from the sale of your home would be used to settle the balance you owe.

Unsecured personal loans

Unsecured loans are not arranged with collateral as part of the loan agreement, and therefore usually come with higher interest rates.
You do not need to be a homeowner to apply for an unsecured personal loan. Your home cannot be repossessed if you fail to keep up with your repayments, although you must ensure that they are made on time or they could have a negative impact on your score.
You may also be charged a late fee if you fail to make your monthly repayments on time or do not pay the loan back in full by the final due date.

What are the main reasons people take out personal loans?

Some typical reasons for applying for a personal loan include:

1. Buying a new car.
2. Home improvements.
3. Debt consolidation.
4. A wedding.
5. Major family events.
6. Home emergencies, such as a broken boiler.
7. Medical bills.
8. Unexpected financial emergency, such as a vet’s bill.

Hit the road with a new car

Whether you’re looking to buy your first set of wheels or upgrade your existing vehicle to a newer model, a loan could help cover the cost.

Home sweet home

Moving can be highly stressful, and that’s even before you’ve considered the costs of finding and purchasing a new home to suit you and your family. Perhaps you’ve thought about putting the slogan ‘improve, don’t move’ into practise?

An extension could add breathing space for growing families and could be a great investment in the long run; an extension could add up to 23% to the value of your home if you do ever decide to sell.

As well as creating more space, there are a number of things you could use your home improvement loan for. 22% of  renovators in the UK choose to upgrade to a new kitchen, with garden makeovers, new bathrooms, loft conversions, double glazing, and conservatories not far behind in popularity.

Debt consolidation

A recent study revealed that, as of January 2024, the average debt per UK household – excluding mortgage(s) and student loans – was £14,792.

With a debt consolidation loan, you pay off all your existing credit accounts in one go. You then make one loan repayment every month for a fixed period of time until the end of the term when the balance has been cleared.

If you take a loan for debt consolidation but do not use it to consolidate any debts, the loan may become unaffordable for you, and any missed payments could negatively impact your credit score and report.

Before you apply for a debt consolidation loan, it is always a good idea to make sure you will not be paying more interest on your new loan than you are currently paying on your existing credit accounts.

The big day

If you’re currently planning your wedding, there’s a chance that you may be finding the process both exciting and a little stressful. Weddings can be expensive, and costs can easily spiral, even with a strict budget in place. In 2023, the average cost of a wedding in the UK was £20,700.

Major family events

Weddings aren't the only family event to stretch our finances. You might require a bit of extra money to finish decorating the nursery ahead of your wonderful arrival, or, sadly, a relative may have passed away without a funeral cover in place.

Home emergencies

From broken down boilers to a washing machine that suddenly decides to spit water all over the kitchen floor, financial emergencies are a real pain. No matter how careful we are with our money, things like this are simply unavoidable and can threaten to leave us out of pocket.

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. This could include dentistry work, which often comes at a significant cost.

Applying for a personal loan

We understand that applying for financial products can be daunting, especially if you haven’t done it before. Don’t worry – we’ve rounded up everything you need to know to help you understand the personal loan application process from beginning to end.

Decide how much you need to borrow

Firstly, work out exactly how much money you think you’re going to need. If you have savings, is there any way that you could use them to cover all or part of the expense? If your savings don’t quite stretch that far, choose the loan amount closest to the sum of money you need. You should never borrow more money than you actually need, or can afford to repay.

Choose a credit broker or lender

There are two ways to apply for a personal loan - either directly through a lender or using a credit broker, both of which can usually be done online.

When you apply directly with a lender, they will run a hard search on your credit profile. Hard searches can remain on your file for up to 12 months, and multiple hard searches over a short period of time could have a negative effect on your credit score.

Credit brokers work with a panel of lenders authorised and regulated by the Financial Conduct Authority (FCA). Based on the information provided on your application, a credit broker will scan their panel of lenders using soft search technology to try to match you with a suitable loan. Soft searches don’t leave a footprint on your credit file, and do not affect your score in any way.

If you are matched with a loan through a credit broker, you will be invited to make a full application directly with the lender. This will include a hard credit search.

If the lender is happy with the outcome of their checks, you’ll be sent a loan agreement. You should read this thoroughly before signing. You must be certain that you can comfortably manage your monthly repayments without this affecting your essential bills, such as rent or mortgage and utilities.

If you're happy to proceed, and you're certain that you can comfortably afford each monthly repayment throughout the term of the loan, you can choose to sign the loan document.

Understanding interest rates and charges

It’s important to remember that you will pay interest on the amount of money you borrow. This will be included in your monthly repayments. You may also have to pay additional charges if you do not make a monthly repayment on time.

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 on what date; and
• what fees (if any) you'll be charged if you fail to make your repayment(s).

When you receive your loan

Some lenders are able to send your money on the same day your application has been approved, but please be aware that each lender has their own timeframe. The time it takes for the money to appear as available in your account will depend on your bank’s policies and procedures, such as if they accept Faster Payments.

In this section, we’re going to focus on three things that are handy to know once you’ve received your personal loan.

1. The importance of keeping to your repayment schedule;
2. What to do if you cannot make a repayment; and
3. Keeping your personal information up to date.

The importance of keeping to your repayment schedule

When you sign a credit contract, you agree to make your monthly repayments in full on time each month within the loan term you have selected. It’s your responsibility to make sure that you stick to that schedule.

What to do if you cannot make your repayments

Life can be unpredictable, and lenders understand this. We hope you won’t experience any of the following, but unexpected events such as a redundancy or a long-term illness that prevents you from working could have an impact on your ability to repay your loan.

If you find yourself in a position where you’re no longer able to make your monthly repayments, you should contact your lender as soon as you can.
This may sound daunting, but your lender will appreciate the fact that you have reached out and let them know. They will want to work with you to come up with a solution.

Informing your lender of a change of personal information

If you move home, change your telephone number, or get a new email address, make sure you contact your lender so they can update their records. You may be able to do this online with some lenders if you have an online account with them.

Your A-Z of personal loans

The world of personal loans can often feel like it's filled with complicated jargon. We’ve provided a brief explanation of some common words and phrases associated with personal loans.

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

Affordability

Affordability is based on your ability to pay the loan back without this causing you any hardship. Affordability is calculated by various factors including your regular income, credit score, and regular expenses such as bills and existing credit commitments.

Annual Percentage Rate (APR)

The Annual Percentage Rate (APR) is used to demonstrate the overall cost of borrowing over the course of a year. All lenders must use the same method of APR calculation even if the term of the loan is less than one year.

There are two types of APR associated with credit products; they are Representative APR and Personal APR.

A Representative APR is the advertised interest rate for a credit product. This is the interest rate or lower that 51% of customers who are accepted for that particular credit product will receive.

A Personal APR is the rate of interest you will actually receive if your application for credit is accepted. It may be higher, lower, or the same as the Representative APR. The rate you could be offered is based on your circumstances, including your credit score and history.

Some lenders offer loans with variable rates of interest. This means that your Personal APR could change during the life of the loan. Your lender will advise you of any changes before this happens.

Credit rating

Your credit rating is an important factor in whether your application for credit is approved or is unsuccessful. Your credit rating is calculated by the credit reference agencies - these include Experian, Equifax, and TransUnion. These companies maintain and update your credit report.

Having a good credit score may mean that you could be able to access credit products with better interest rates. People with lower credit scores could find it more difficult to be accepted for a loan. If you are approved for a loan with a lower credit score, you may find that you are not able to borrow as much as you would like to or you are offered a higher rate of interest.

You can find out more about credit scores and how lenders use them  here.

Early repayment charge

You may be able to settle the balance of your loan in full before the term expires. Some lenders may charge an early repayment fee for this.

If you are approved for a loan, always check the terms and conditions of your credit agreement before you decide to sign. Make sure you understand if you will be charged a fee if you plan to make an early repayment or clear the balance of your loan in full before your final due date.

Interest rate

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

Loan agreement

Your loan agreement is the legal contract you sign with your lender. It contains the full details of your borrowing arrangement. You should read this thoroughly before deciding whether to accept an offer.

Loan agreements are covered by the Consumer Credit Act, which includes your rights when entering into an agreement with a credit provider. These include:

• The type of credit agreement you’re entering into.
• The cost of the credit, including any interest rate charges.
• The amount you’ll have to pay.
• When payments are due.
• Your right to cancel.
• Conditions involving early repayments.

Loan amount

Personal loans range from £100 to £25,000, although loans up to £35,000 may be available from banks and other high street lenders. The amount you can borrow is subject to status and affordability.

Little Loans can help you search for a loan from £100 to £10,000 with terms starting at 3 months up to 60 months, depending on the amount you choose to borrow.

Loan application

A loan application form is what you use to share your personal and financial details with a lender or a credit broker. The information you provide will help the lender or credit broker run their required checks.

Loan calculator

A loan calculator can give you an idea of the cost of a loan based on the amount you borrow, the term of your loan, and the interest rate. These are usually displayed for illustrative purposes and should only be used to give you an idea of how much you could pay. Always check the terms and interest rates of your loan offer if you are accepted as they could be subject to change.

Loan repayments

The amount you agree to repay each month to your lender in order to repay your borrowing in full. Your monthly loan repayment amount will be shown to you as part of your loan offer. Make sure you can comfortably afford to make your monthly repayments before deciding to sign any credit agreement.

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. If you wish to make an overpayment, it’s best to check your terms and conditions for any fees you could be charged.

Repayment holiday

Some lenders could allow you to take a break from monthly payments for a short period if your circumstances change. It’s important to remember that the outstanding balance of your loan will continue to be charged interest during any repayment holiday. Repayment holidays are usually subject to approval, and each lender will have their own regulations.

Term (loan term)

Your loan term is the length of time you agree to pay a loan back - for example, 3 months, 2 years, or 5 years. You may also hear this referred to as the duration of your loan.

Total amount repayable

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

What’s the best personal loan?

Everyone’s circumstances are different, and so are your borrowing needs. When we talk about ‘the best loan’ there is no one-size-fits-all answer. The best loan a lender can offer you is one which is affordable and manageable for you. You may want to compare different loan products and lenders before deciding which one is right for you.

When considering a loan, compare the monthly repayments with the amount of disposable income you have left at the end of a typical month. This will help you decide if you’ll be able to comfortably afford to repay your loan without this affecting your other essential outgoings.

How can I get a personal loan?

You can apply for a personal loan directly with a lender, or you might choose to use a credit broker, such as Little Loans.

There are a number of things to take into consideration before you apply for a loan. The most important thing to think about is whether you can afford the monthly repayments. Falling behind on or failing to make repayments can lead to serious money worries, as well as additional fees and charges and a decline in your credit score.

To get a no-obligation quote with Little Loans please click here.

I’m worried about my finances; who can I talk to?

We understand that talking about money can make us feel uncomfortable, but asking for help is the first step towards taking back control of your financial situation.

If you have any existing credit accounts you are struggling to repay, contact your lender as soon as you can. Your lender will want to work with you to understand the situation and will be able to suggest ways to manage your repayments.

You can also access advice on money and debt management from organisations such as Citizens Advice, National Debtline, and MoneyHelper.

Little Loans have teamed up with debt charity StepChange to provide a free online Money Health Check quiz. Your answers are completely confidential and will signpost you to further help.