If you are looking to borrow money to fund a big purchase, a wedding, home improvements or to consolidate debt, finding the best deal with a competitive interest rate and favourable conditions is important. In this article we give you a clear guide to how to apply for a loan, explore the different types of loans available and also look at alternatives to loans.
Step-by-step guide to applying for a loan
- Work out what type of loan you need - secured, unsecured/personal or guarantor
- Decide how much you want to borrow
- Choose the repayment term - remember, aim to pay the loan back in the shortest time possible
- Shop around for the best deal - consider the fact that the stated APR may not be the rate you actually get, depending on your circumstances
- Use the lenders' eligibility checker to see if you are likely to be accepted for the loan - being refused for loans can harm your credit score
- Complete the application as accurately as possible and submit it to the lender
- If you are approved, for many lenders you will receive the money within 24 hours. If you need to submit physical paperwork, it may take a week or more to receive the money into your account
- Make sure you keep up with the repayments and repay early if possible (assuming there is no penalty to do so)
What information do I need for a loan application?
Once you have located the best loan deal available for you, you will typically need to gather together certain information to help you complete the application. This will enable the lender to verify your identity, assess your credit-worthiness and determine your eligibility. This may include:
- Date of birth
- Current address and previous addresses
- Employment status, job title and employer
- Income (salary and any other household income)
- Marital status
- Other financial commitments, including existing borrowing and living costs
Make sure you complete the application form as accurately as possible as any errors could delay your application or lead you to be turned down for the loan, which could then feature on your credit record.
Should I apply for a loan?
A key consideration before applying for a loan is whether you can afford the repayments. While it can be easy to see a loan as a simple way to be able to afford what you want now rather than having to save up, it is a financial commitment that will be with your for many months - if not years - to come. Before taking out a loan, ask yourself:
- Are my circumstances likely to change over the duration of the loan? How stable is your income and how much is it likely to fluctuate over the term of the loan? While it's impossible to foresee every possible eventuality, if you know that your company is considering redundancies or you have plans to start further education, for example, this may affect your ability to keep up with the repayments on the loan.
- How much do I really need to borrow? It can be tempting to overestimate how much you need to borrow or to add on a little extra to fund other spending. Keep in mind that interest will be payable on the total sum you borrow, so keeping it to a minimum by properly working out how much you need will certainly save you money and make the loan more serviceable.
- How quickly can I pay back the loan? It is always better to pay off a loan over the shortest amount of time possible. This serves to reduce the total amount you have to repay as you won't accrue as much interest. You need to find the sweet spot of the maximum amount you can afford to repay each month to reduce the term of the loan, but without making it too much of a burden and increasing the risk of defaults. Also, check if you can repay the loan early without penalty
- Is there an alternative to taking out a loan? Could you delay the spending to give you time to save rather than taking out a loan? A good place to start is using a budgeting tool to help you develop a savings habit. For more information, read our article "The best budgeting apps in the UK: How to budget without trying". Alternatively, depending on what the loan is for and how much you need to borrow, it may be worth considering an interest-free payment plan from the retailer or a credit card that has an interest-free period on purchases or money transfers (there are more details on this later in the article).
What type of loan should I apply for?
There are a number of different types of loan available, so before starting the application process you will need to work out which is the best one for your circumstances. The main ones are:
This type of loan, as the name suggests, is secured against another asset - typically your house - which means that, if you don't keep up the repayments, that asset is at risk of being repossessed. The advantage of this type of loan is the rates are usually lower although, because you typically pay them off over a much longer period, you can end up paying a lot more in interest over the lifetime of the loan.
A personal (or unsecured loan) isn't linked to any other asset and so poses less risk than a secured loan. If you don't make the repayments it will damage your credit record and you could end up being taken to court for the amount you owe, but there is less threat of more serious consequences than with a secured loan. A personal loan is generally spread over a shorter amount of time and the monthly repayments tend to be higher.
For more details on the differences between secured/unsecured loans, read our article "Secured vs unsecured loans: Which is best for me?"
If you are struggling to get a loan because you don't have sufficient credit history or you have a poor credit record, a guarantor loan can help you to successfully borrow the money you need. They work by somebody else - typically a family member - acting as a guarantor for the loan, which is to say that they guarantee that if you don't make the repayments, they will take responsibility for the debt.
It's worth noting that, if you need the money quickly, guarantor loans are sometimes given initially to the person guaranteeing the loan, giving them a two-week cooling period if required before they then transfer the money to you.
Where can I find the best loan for me?
For all loans it is worth shopping around to make sure you secure the best and cheapest deal. For personal loans a good first port of call is with your existing bank or building society as they often offer preferential rates for existing customers and it's convenient to be able to manage your finances in the same place. Your bank will also often be the best option if you are looking to borrow a larger amount - say. over £25,000 - as it can be difficult to secure this level of borrowing as an unsecured loan from other lenders.
You should also compare the rate you could get from other lenders - including those not available on the high street - by using one of the many comparison sites. They allow you to search by the amount you are looking to borrow and the timeframe you want to borrow it over. Be aware that not all sites offer a whole-of-market offering, meaning you won't see all the available deals, just the ones from providers they have partnerships with. For this reason, it pays to shop around across a few different sites and providers.
For a secured loan, it also pays to see if you can extend your borrowing from your existing mortgage lender before looking for other options. This may be particularly attractive to those wanting to fund home improvements. Again, it makes it convenient to keep your loans in one place, helping ensure you keep on top of the repayments. Bear in mind that the application process is more stringent with secured loans and requires more paperwork, so allow yourself plenty of time to find the best deal and put the wheels in motion before you need the cash.
How much can I borrow for a personal loan?
The amount you can borrow will depend on a number of factors, including:
- Your income - this includes income from employment and any other household income
- Your credit history - if you have missed payments or defaulted on loans or credit cards in the past, it is more difficult to get a loan. See the section below on what you can do if you have a poor credit rating but still want to take out a loan
- Any existing borrowing or financial commitments - the lender will look at how much borrowing you already have, including things like your mortgage, car finance and credit cards. They may also take into consideration factors like whether you have children who are financially dependent on you.
It is worth noting that it can often be cheaper in terms of the APR to borrow a larger amount. Certainly it is more expensive to borrow £3,000 or less, so it may be worth considering a suitable credit card or another form of borrowing for this level of debt. However, generally you should borrow the minimum amount you need and pay it back over the shortest possible time.
How can I apply for a loan if I have bad credit?
When you apply for a loan, the prospective lender will check with one or more of the credit rating agencies, Equifax, TransUnion or Experian. They collate information about how you have behaved in relation to borrowing and credit agreements in the past. This information is also available to you and you should check your credit report with at each of the agencies before applying for a loan. You could have a poor credit rating if you have a history of:
- Late payments
- IVAs or bankruptcy
- Little or no credit history
All is not lost if you have impaired credit but still want to apply for a loan. There are several providers who specialise in "poor credit" loans, although you should expect to pay a significantly higher amount in interest. Before going down this path, you need to make sure you have properly thought it through and can afford to keep up with the repayments on this debt or risk making your credit rating substantially worse in the future.
For advice on how to improve your credit score, read our article "How to improve your credit score quickly"
Personal loan or credit card
As we have discussed earlier in the article, if you are borrowing less than £5,000, it can be cheaper to take out a credit card rather than a personal loan. There are two options available:
- A 0% interest on purchases credit card: There are a range of cards that offer an interest-free period of up to around 24 months on purchases. Many also combine an interest-free balance transfer feature too, meaning you can move over any other existing credit or store card debt, which can also serve to save you money. For details of the best deals available, look at "Compare the best 0%purchase credit cards"
- A money transfer credit card: With this type of card you can transfer money from the credit card to your bank account, while also enjoying up to 18 months interest-free. The best deals can be found in our article "A complete guide to the best money transfer credit cards"
With both of these options you are given more flexibility in terms of repayment than you would be with a personal loan. However, you have to be disciplined and make sure you keep up with paying back the debt as, if you don't, you will be hit with a much higher interest rate than you would with a loan once the interest-free period comes to an end. You should also be mindful that you may not be offered the full interest-free offer period as advertised as the final deal with be subject to status.