Applying for a loan does not need to be complicated. By following a simple set of steps, you can streamline the process and locate the right lender for your borrowing needs. From funding a wedding, to paying for home improvements or consolidating debt, finding the best deal with a competitive interest rate and favourable conditions is important for any borrowing plans. In this article, we will give you a clear guide to how to apply for a loan and how to make sure the deal you are getting is the right one for you.
Step-by-step guide to apply for a loan online
Applying for a loan can seem daunting, but the application process is actually quite straightforward. Here is an example of the basic steps to follow:
1. Check your credit score
Your credit score is a good indicator of how likely it will be that a loan provider will approve your application. A low credit score is usually a sign of a poor or limited borrowing history, while a good credit score suggests you have borrowed money and paid it back on time in the past. You can use your credit score to get an idea of whether your application will be approved or if you need to work on building your credit history before you apply for a loan.
Learn how to check your credit score by reading our article ‘The best way to check your credit score for free’.
A low credit score is not the end of the world, as there are plenty of ways to give it a boost. Read our article ‘How to improve your credit score quickly’ for advice on how to improve your credit score.
2. Decide how much you want to borrow
Knowing how much you want to borrow is a critical step in the application process. Are you looking for a few thousand pounds for a big purchase, or tens of thousands to renovate your home? The more specific you can be, the better, as borrowing too much can be an unnecessary expense. Do your research to make sure you have accurate and up-to-date costings for whatever it is you plan to spend your money on.
3. Work out how much you can afford to borrow
It should come as no surprise that the most important part of taking out a loan is working out how you are going to pay it back. Loans are repaid through regular monthly instalments, which include interest as well as the original amount you wish to borrow. You will need to have room in your monthly budget to afford these payments, as missing them can have serious knock-on effects on your ability to borrow in the future and your general financial wellbeing. Look closely at your finances and work out how much you can afford to pay each month.
4. Compare loan deals
You should now start to think about what level of interest you may need to repay on your loan. The best way to do this is by comparing deals online. You will see a whole host of different loan options and different types of borrowing advertised. Make sure you understand what type of loan you are looking for. Secured loans will require you to put up a valuable asset to guarantee what you borrow will be repaid, while an unsecured loan will not. We have more information in our article ‘Secured vs unsecured loans: Which is best for me?’.
Each deal you see online will include a representative APR (Annual Percentage Rate). This figure gives you an idea of how expensive that loan will be, though the final interest rate you pay will depend on your own credit history and financial circumstances. You can read more in our article ‘What is representative APR?’.
Be aware that submitting a full application at this stage will likely result in a ‘hard’ credit check. Be aware that lots of hard credit checks on your credit history in a short period could damage your credit score. Many providers will include an ‘eligibility checker’, which can help you see how likely you are to be accepted without needing to submit a full application.
5. Choose your loan term
Once you know how much you need to borrow, how much you can afford to repay each month and how expensive your borrowing is likely to be, you can work out how long you will need your loan term to be. Your repayments will be split over the course of the loan term. This means that the longer the term, the less you pay per month. However, a longer loan term means there is more time for your interest payments to compound, which means you will pay more overall.
At this stage you could use an online loan calculator (such as this Money Helper tool) to help you with the maths.
6. Get a personalised quote
Remember that the advertised representative APR is a useful indicator of the cost of a loan, but it is not necessarily what you will pay. To find that out, you will need to ask for a personalised quote from your chosen lender. This should give you a personal APR, which will tell you how much your loan will cost, minus early repayment charges or late payment fees. In some cases, a provider will perform a ‘hard’ credit check at this stage.
7. Complete your application
Now that you know how much you need, what you can afford, how expensive your loan will be and how long it will take to repay, you can complete your loan application. Make sure to fill out the application as accurately as possible and include all the details requested by the provider.
You will likely be asked to confirm basic personal details, answer questions about your financial circumstances and detail what you intend to use the loan for.
Most lenders will send the money to your chosen account within 24 hours once the application has been approved. If you need to submit physical paperwork, it may take a week or more to receive the money into your account.
What information do I need for loan applications?
You will typically need to gather certain personal and financial information to help you complete your application. This will enable the lender to verify your identity, assess your credit-worthiness and determine your eligibility. This may include your:
- Name
- 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 the process or lead you to be turned down for the loan.
Should I apply for a loan?
The most important 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 you 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?
Having an unstable income could make it harder to repay your loan. It is impossible to foresee every possible eventuality, but there are certain things to look out for and think about. For example, if you know that your company is considering redundancies or you have plans to start further education, it 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.
How quickly can I pay back my loan?
It is almost always better to pay off your loan in the shortest amount of time possible. This usually reduces 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 or struggling with other expenses. Also, check if you can repay the loan early without penalty.
Is there an alternative to taking out a loan?
For example, you could delay your spending to give you time to save up, rather than borrowing the money. If you find it difficult to control your spending, try a budgeting tool to help you develop a savings habit. Read our article ‘The best budgeting apps in the UK: How to budget without trying’ for more information. Alternatively, it may be worth considering a credit card that has an interest-free period on purchases or money transfers. Read our article ‘Should I get a credit card?’ to find out more.
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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 UK’s main CRAs (Credit Rating Agencies). These are Equifax, TransUnion and Experian. Each one collates information about your borrowing history and past credit agreements. This information is also available to you, so check your credit report with each of the agencies before applying for a loan. You could have a poor credit rating if you have a history of:
- Late payments
- Defaults
- CCJs
- 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, otherwise you will risk making your credit rating substantially worse in the future.
We have more information in our article ‘How can I get a loan with poor credit?’.
What if my loan application is rejected
There is no guarantee that your loan application will be accepted. If you are rejected, take some time to think about why and whether you can do anything to make yourself a more attractive borrower. This could be improving your credit score, clearing existing debt or correcting a mistake on your credit report.
What you should not do is immediately submit another application. Credit applications will show up on your credit report and too many in quick succession will suggest to lenders that you are struggling to manage your money responsibly. If you are struggling with debt, you should contact your lender to arrange a new repayment plan and reach out to a free debt advice service. We have more information in our article ‘Where to get free debt advice’.
You could also consider a different form of borrowing. For example, a credit card could help you borrow more cheaply and rebuild your credit rating. Read our article ‘Credit-builder cards - which is the best credit card if I have poor credit?’ to learn more.
What about applying for a credit card?
If you are borrowing less than £5,000, it can be cheaper to take out a credit card rather than a personal loan. You may even be able to access a 0% interest purchase credit card. These are a range of credit 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 costly credit or store card debt. For details of the best deals available, look at our article 'Compare the best 0%purchase credit cards'.
A credit card offers more flexibility on repayments when compared to a loan. However, you have to be disciplined and make sure you keep up with paying back the debt. 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 can find out if a credit card would suit you by reading our article 'Should I get a credit card?'.
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