Personal Loans

There are different loan types, each with its own risks and advantages, so it’s critical to know which one is best for you before applying. 

Let us help you understand the different types of loans so that you can make a wise decision. 

Secured Loans 

These loans need collateral, usually an asset like your home, so if you can’t make your payments, you risk losing that asset. A secured loan, however, may still be appropriate if you have faith in your ability to make your payments on time. Even if your credit score is low, you might be able to acquire better rates or larger loan amounts with a secured loan because collateral reduces the risk for the lender. Also, with a secured loan, you can borrow a larger sum of money. 

Unsecured Personal Loans

You can get unsecured loans, usually referred to as personal loans, from a lender or a bank. You will consent to make regular payments over a certain period of time until the loan, plus interest is fully repaid. Unsecured loans aren’t backed by a property, like your house. Hence, the interest rates for these loans are comparatively higher than a secured loan. However, if you have a good credit score, you have a chance to get a personal loan at a lower interest rate. 

They can be useful if you want to borrow money for debt consolidation, a new car, a wedding, or home improvements like a new kitchen. 

Now there are various types of unsecured personal loans that you can apply for depending on your financial needs. Let us explore them. 

Debt Consolidation Loans 

With the help of a debt consolidation loan, you can combine all of your outstanding debt into a single one. Add up all of the debt you currently owe, then search for a loan to cover that amount.

Making just one payment each month rather than several smaller ones to several lenders could save you money overall as well as make your life much simpler. However, you should make sure that you are satisfied with the duration of the loan period as it may imply that you will be paying off your debt for a longer period of time.

Home Improvement Loans 

Home improvement loans are essentially regular loans that you can get to pay for repairs, renovations, additions, or other upgrades.

You could get a home improvement loan for:

• A conversion of a loft
• Adding an extension 
• Remodelling a room  
• Creating a conservatory 
• Installing a new kitchen or bathroom 
• To make energy-efficient upgrades like double-glazing and insulation

A home improvement loan can assist you in paying for the labour and supplies required to accomplish your planned renovations, no matter how big or small they may be.

Wedding Loans 

Simply put, it is a personal loan that you can take to manage the expenses for your dream wedding. You borrow an amount from a lender and pay them back in instalments. 

It is a good way to have your dream wedding without burning a hole in your pocket. 

Holiday Loans 

A holiday loan is a type of personal loan designed to pay for your ideal vacation. Getting a loan for a vacation can speed up the planning process and assist with any upfront costs.

You will repay the loan in accordance with a repayment plan with an agreed-upon variable or fixed interest rate. You will be able to budget your money more effectively and feel more at ease if you do this.

Car Loans 

A new or used car can be purchased with the help of a car loan. Even though an automobile loan is typically unsecured, some lenders prefer to use the vehicle as collateral. With a loan, you can spread out the cost of the vehicle over a number of monthly payments at a fixed interest rate. 

The contract is with the lender, who is entirely independent of the location at which you decide to purchase your car. You can use the funds to cover the entire cost of a new car or just a portion of it. 

Your income and credit score will determine the cost of the personal loan, with borrowers with excellent credit often receiving the lowest rates.

Applying for a personal loan is simple, straightforward and doesn’t take much time if you are applying for it online. If you are considering borrowing a personal loan, you should understand the eligibility criteria, the process to apply for it, and what credit score do you need among other factors. 

Let us go through each of these in detail. 

Eligibility Criteria for Borrowing a Personal Loan 

You must be certain that you meet the requirements before applying for a personal loan. To qualify for a personal loan, you must be over 18 and a resident of the UK. These are the two most basic eligibility criteria that every lender or financial institution will have.

Lenders will also determine if you meet their requirements by taking into account additional factors, most notably your credit history, other loans you have, and your income. 

Required Documents for Applying for a Personal Loan 

Further, lenders will require documents such as a driver’s license, passport, and most recent utility bills to prove your identity and place of residence.

Documents Required for Proof of Address for Personal Loans

When you apply for a personal loan with a lender, they will need you to submit documents that will prove your residency. Each lender may have their own list of specific documents they will accept. However, listed below are a few commonly required documents to be considered as proof of address: 

• Driver’s licence
• Benefits entitlement letter, if any
• A recent utility bill
• A recent bank, building society or UK credit union statement
• HMRC Tax Notification
• A recent tenancy agreement issued by a solicitor, housing association or local council
• The local authority tax bill for the current year

Documents Required for Proof of Identity for Personal Loan

The documents you need to prove your identity may vary from lender to lender. You may be asked for the following documents by the lender you apply to for a personal loan:

• Driver’s licence
• Passport
• Biometric Residence Permit

To assess the risk of lending to you, lenders will review your credit history and credit score. Your credit score influences:

• Whether you qualify for a loan
• The maximum amount you can borrow
• The interest rate you will be charged

Your chances of receiving a loan offer and paying a lower interest rate increase with your credit score.

Experian, Equifax, and TransUnion are the three primary credit reference agencies used by lenders in the UK. To assess your credit score, these companies use information from a variety of sources, including past and existing lenders, utility providers, and some publicly available data. For instance, they may consider how long you have been at your present home and whether you have experienced difficulties making repayments in the past to make their decision.

A soft credit check is generally conducted by lenders to assess your loan application in the primary stage. Once you give your approval on it, the lenders will conduct a hard credit check on the profile to offer you an interest rate based on your profile. 

Income and Employment Verification for Personal Loan

Credit reference agencies can confirm your income through current account turnover. But on occasion, you might still be required to provide the following information:

• Pay stubs
• Bank records
• Tax returns from the previous two years, or other documentation demonstrating income, if you are self-employed.
  
  

Lenders may also ask you to fill in your employment details. However, the lender won’t always get in touch with your employer. Your pay stubs and your current account balance are typically sufficient to satisfy a lender’s job verification requirements.

The lender may contact your employer for confirmation if necessary. 

Personal Loan Application Process

Applying for a loan can be done in person at your nearest branch, over the phone, by mail, or online. Don’t assume all lenders will provide every option; double-check first.

You must perform additional security checks when applying for a loan online. It’s crucial to verify in your browser that the website’s URL (web address), for instance, begins with “https://”. Your personal information is secured on the website because of the “s” at the end of the “http” protocol.

The procedure is typically the same regardless of how you apply for a loan. 

• You fill out an application form with information regarding the loan you seek as well as your contact and employment information. Additionally, this authorises the lender to perform a credit check.
• In order to determine how risky it would be to lend to you, the lender does a credit check. This will be used to determine whether or not to lend you money and the interest rate it will charge. Additionally, it will confirm your address information and check fraud lists.
• The lender decides whether to lend to you and at what interest rate. It could not be at the indicated representative APR rate because it will depend on your unique situation.
• You can then decide whether to accept or reject the offer.

When you borrow a loan from a lender or a bank, or any other financial institution, you will have to repay the loan over a certain period and at an interest rate. 

Let us understand how interest rates are levied on personal loans and how the repayment term works in detail. 

Understanding Personal Loan Interest Rates

The cost of borrowing money is called interest, and it is often stated as an annual percentage of the loan amount (or the amount borrowed on a credit card). 

Interest rates are different from Annual Percentage Rate (APR). The interest rate a lender or a bank, or any other financial institution will levy on the loan you borrow depends on a range of factors like your credit score, credit history, and current debts.

The interest rate will be decided by the lender after reviewing your loan application form and conducting a credit check.

Let us understand how the Annual Percentage Rate (APR) works to have a clear picture.

 APR (Annual Percentage Rate) for Personal Loan

The annual percentage rate (APR) is used to explain the actual cost of borrowing. It considers the interest rate and any additional charges levied on the loan that you borrow. Before you commit to a credit agreement, all lenders are required to disclose their APR to you. The advertised rate that at least 51% of people approved for the credit will receive is known as the representative APR. As a result, over 50% of those who are authorised for the deal might not qualify for the quoted rate and end up paying more.

Fixed Vs. Variable Interest Rates 

With a fixed interest rate loan, the interest rate that you had signed up for in the beginning of the loan will remain the same throughout the term of the loan. That means you will always have to pay a fixed amount of money as a repayment. However, with a variable interest rate loan, the interest rate will vary throughout the term of the loan. That means you may end up paying more or less as compared to a fixed interest loan.

Personal Loan Repayment Terms

The repayment period of a personal loan generally ranges between three to seven 7 years. However, there are lenders who may offer repayment periods slightly longer or shorter than this too.

Check with your lender when you are deciding on the loan repayment term. Also, the longer the repayment period, the more interest you will be paying as your monthly repayment will be lower.

Early Repayment and Prepayment Penalties 

Early repayment or resettlement refers to paying off your debt before the end of your credit agreement. Depending on the terms of your loan, you may be able to pay off all or a portion of it early.

The loan agreement you signed or received when you applied for the loan will include specifics on any penalties and charges for paying off the loan early.

Early repayment fees are designed to offset part of the interest you would have had to pay over the course of the agreement’s full term.

The amount you will borrow depends on your financial needs. However, there are a few things you must consider about the amount and the duration you choose to pay back the personal loan.

Determining the Loan Amount for Personal Loan

While loan amount that is offered vary between lenders, personal loans typically range from £1,000 to £35,000. The amount you are eligible to borrow may also be influenced by the length of the loan, your repayment capability, and your past financial management practices.

However, a number of factors, such as your credit history and financial background, will determine how much you are eligible to borrow. Creditworthy individuals are frequently given preference by lenders. The three primary credit referencing agencies (CRAs) in the UK assign consumers different credit scores.

If you’re a homeowner and you need to borrow more money than what is offered to you, you should think about getting a secured loan that will use your home as collateral.

Loan Duration Options 

The majority of loan companies and lenders who offer unsecured personal loans will give you a fixed sum of money at a fixed rate to be repaid over a fixed length of time. The repayment period may last between one to 30 years.

The longer the loan duration, the more you will be paying interest over the years. Ensure that the monthly repayment is easily payable by you so that you do not fall behind the repayments.

Loan Affordability Assessment 

When you borrow money, a lender will perform an affordability check to see if you can afford to pay it back. To ensure that the loan amount and terms the borrowers receive are appropriate for their unique circumstances, all lenders are responsible for conducting affordability checks on borrowers.

A lender must perform an affordability check before approving you for a loan in order to make sure you can afford to repay it.

If you don’t follow through with this, you could end yourself with a loan that you can’t afford or that is too big for your needs.

To determine whether the loan is manageable for you, responsible lenders will inquire about your income and regular living expenses. It involves looking at your income as well as your outgoings, which are committed expenses like bills and other recurring payments.

By calculating your remaining income, they can establish how much you can afford to pay them on a regular basis.

You can borrow a personal loan online as it will save you a lot of effort and time. Most lenders and banks allow you to apply for a loan online from the comfort of your home.

Let us understand in detail the loan approval process, and how and when your loan amount will be disbursed to your account in detail.

Personal Loan Approval Process

Depending on the lender, the application process, and whether you need to submit additional documentation to support your loan application, the length of time it takes from when you submit your loan application until the funds get deposited in your bank account varies. It can take up to a number of weeks, although in rare circumstances you can get the money even on the same day.

Once the lender receives your loan application, they will run a credit check to determine your affordability. Along with that, the personal and other information you have shared while filling up the application will also get reviewed.

The timeframe for your loan application to be approved varies based on a number of factors that are listed below:

•  The time taken for internal processes
• Whether you already have an account with them
• Whether you provide additional documentation to support your application such as pay stubs

With LoanTube, the lenders we have partnered with are fast in the approval process. The moment you click on the submit button after filling out the application form, lenders will show you the APRs they want to offer you. The unique thing about us is, the rate you are offered will not change later on. It will remain the same.

Personal Loan Disbursement Methods

Mostly, lenders or banks will deposit the money in your bank account if the loan is approved. Ensure that the bank details shared by you are correct so that there is no mishap.

Timeframe for Loan Approval and Disbursement 

The earliest you could receive your money if granted, is the same day or the next business day. If you apply for a loan from an online-only lender or a bank with which you already have an account, this is more likely to be the case.

On the other hand, after approval, a personal loan from a credit union may take up to two weeks to arrive.

Common Reasons for Loan Rejection 

When an applicant doesn’t meet the requirements of the lender, the loan application is refused. For instance, depending on their financial history or affordability, they can seem like too much of a risk to lend to. Each lender has their own set of lending criteria. Therefore, even if your loan application was turned down, there is still a chance that another lender will approve it.

Let us go through the most common reasons your personal loan application was rejected:

For one or more reasons, you might have been rejected. For instance, if you have:

• Low affordability
• Financial association with someone who has a bad credit score
• Too many credit applications in a short duration
• Non repayment of a loan in the past
• Wrong or inaccurate information in the application form
• Your income is not considered enough to repay the loan you are trying to borrow

If you have applied for a loan but have not been approved, you should try to determine why the lender rejected your application and try to address that problem before applying again.

You could take a number of actions to improve your likelihood of obtaining a loan in the future.

• Verify your Credit Score

If you apply for a personal loan and are declined, the lender should let you know which credit reference company it used to determine your creditworthiness.

Then, you may get in touch with the credit reference agency and request a copy of your credit history. Reviewing your credit report will help you know if there are any unusual occurrences, such as missing payments or if someone has applied for credit illegally using your personal information.

You can also review your history to see if there are any errors, such as a payment that was made in the wrong amount or a mistake with your personal information. If this has occurred, you must get in touch with the organisation and request that it fix the issue.

• Boost your Credit Score

Your credit score may be a factor in why your loan application is turned down, as lenders consider those with less-than-stellar credit histories to be more risky.

Therefore, improving your credit score may make it easier for you to be approved for a personal loan. Your score can be increased in a variety of ways, including:

• Getting yourself registered on the electoral roll
• Maintaining payment on any outstanding debtsEnsuring that your credit score information is accurate and up to date
• Avoid Applying for a New Loan Right Away

Regardless of whether your credit application is accepted or rejected, the credit check performed by the provider leaves a trace on your credit report.

Making numerous applications in a short period of time will lower your credit score. Also, multiple credit applications denote that you are in dire financial need and have poor financial management. Therefore, if you have been turned down for a personal loan, it’s crucial not to keep applying.

Take some time off before you reapply for a personal loan or any other form of credit.

• Pay Off any Additional Debt

Paying off your current obligations, if you are able to, may help you qualify for a loan in the future. You might increase your credit score and ease the strain on your budget by making extra payments on your credit card or fully repaying an outstanding loan.

As a result, less of your income would be used to pay off current obligations, which might make lenders more open to your request for a new loan.

You can have peace of mind, save costs, and protect your credit score by keeping up with your loan repayments. Whenever you borrow any form of credit, you should ensure that you are borrowing money wisely and responsibly. Not repaying the loan back can have implications on your credit score and it may hamper your financial health in the long run.

Creating a Loan Repayment Plan 

When you manage your borrowing well, you can get out of debt more quickly, resulting in less interest paid. Also, repaying the loan on time helps you avoid paying any late fees. It improves your credit rating, which in turn increases your ability to get more credit.

As there are so many benefits to managing a personal loan repayment, you must have a solid repayment plan.

Schedule payments for things like your mortgage or energy bills to go out right after you receive your paycheck. Budgeting for the remainder of the month might get simpler as a result.

You can avoid missing those crucial payments by keeping track of your account balance by opting for text alerts.

Budgeting for Loan Repayments 

It is critical to evaluate how you will pay back any loan you consider taking out. You can ensure you are getting the best deal and can make all the repayments by knowing the exact cost of your borrowing.

Once you know the actual cost of your borrowing, you can include the loan repayment in your monthly budget so that your financial journey is smooth till the time the loan is completely paid off.

One of the best ways to take charge of your finances is to create a budget. It will assist you in determining where your money is going, how much you need to spend on bills and necessities, and potential areas for expenditure cuts.

Create a monthly budget as per the repayment amount of your loan and ensure that you stick to the budget you have created.

Late Payments and Penalties 

Serious repercussions can result from loan defaults, including the transfer of the debt to collection agencies and/or legal action. Your credit score may suffer if the loan is backed by your house or vehicle, which you may eventually lose.

 The fees you have to pay as a late penalty may vary from lender to lender.

 You face the risk of more severe repercussions, which may be considerably more harmful if missed payments start to become a pattern. Missing payments repeatedly can result in default, in addition to additional interest, late penalties, and a negative influence on your credit score.

Loan Refinancing Options 

When you refinance a loan, your previous loan is paid off with a new one. Usually, the new loan will be less expensive or have a shorter duration than your previous one.

The concept is that by shortening the term or switching to a lower interest rate, you reduce the cost of repaying the debt. Future payments go towards paying off the new loan.

Your payments may go up if your loan term is cut short. However, it will be paid off sooner and you will pay less in total interest than if you had lent the money over a longer period of time.

You can consider a debt consolidation loan to combine all your unpaid debts into one.

Dealing with Financial Difficulties 

Even though it might be challenging to break the cycle of overspending that results in a mountain of debt, facing it head-on and creating a workable plan to pay it off are crucial steps in putting your finances back on track.

When considering how to get out of debt, there are various steps to take into account. First, who to consult for expert assistance and what alternatives are available. And the second step is how to budget for the future to prevent getting into debt again.

If you think you cannot manage your debts on your own, feel free to reach out to any FCA authorised debt solution offering organisations. The experts can guide you better after assessing your unique situation.

Your credit score is one of the several factors that influence the lender’s decision of whether you qualify for a loan or not, and it’s also one of the most crucial ones.

 Your credit score is a number that credit reference agencies (CRAs) compute to show how successfully you have handled your past financial obligations and repayments.

There is no magic credit score that you must have in order to get guaranteed approval for your personal loan application. Because different CRAs use various scoring methodologies, the score you receive from one CRA won’t be the same as that of another.

Let us understand more about credit scores and personal loans in detail.

Impact of Personal Loans on Credit Scores

As long as you consistently make on-time payments on your personal loans, you can increase your credit score over time. When you formally apply for a personal loan, a hard credit check—a more detailed analysis of your credit history—is triggered. Although some checks may remain on your credit record for longer, a hard inquiry normally remains for a year.

Your credit score may suffer if you submit multiple loan or credit-related applications in a short period of time. Therefore, it makes sense to only apply for a loan if you are certain that you will be accepted.

Building and Improving Credit History 

Making timely payments shows that you are a responsible borrower and could help you improve your credit score. However, if you want your score to increase, you must also successfully manage all of your other credit obligations, not just this one loan. In the long run, building a credit history can be aided by establishing a track record of consistent, on-time loan repayments.

Your credit score may increase if you consolidate your unpaid debts into a personal loan because it will be simpler to manage your bills and make on-time payments.

Managing Multiple Loans and Credit Accounts 

Your ‘credit mix’ is frequently taken into account when credit referencing organisations determine your credit score. This refers to the variety of credit products to which you have access. A personal loan, credit card, and mortgage are three examples of a good credit mix. Being responsible with various different forms of credit demonstrates to lenders that you can make payments on time even when managing several loans.

Since interest rates have been increasing consistently, doing your research before applying for a personal loan can pay off. Rates for personal loans vary depending on the lender but are typically lowest for borrowings between £7,500 and £20,000. Monthly payments remain the same for the duration of the selected borrowing term because the interest rate is fixed.

Let us go into the details of personal loan comparison.

Researching and Comparing Loan Providers 

Comparing personal loans before borrowing one will help you choose a loan with the best interest rate as per your unique situation. There are multiple lenders and banks in the market that offer personal loans. And you will not be able to know the best rate that you can be offered if you do not carry out research and do not compare the loan quotes that you receive.

Also, remember to deal only with lenders who are authorised by the Financial Conduct Authority (FCA).

Interest Rate Comparison 

To compare quotes from multiple lenders, you have to fill in the application form on their respective websites. Once you submit the application, the lenders will assess your details and run a credit check to know your affordability and then offer you an interest rate based on your past and current credit borrowing behaviour.

Once you get the loan quotes from a few lenders, you can compare which lender has a better offer for your loan amount. That way you can choose a lender who is offering the lowest rate of interest on the loan.

Loan Terms and Conditions 

It is important to go through the fine print of the personal loan agreement to understand what you are signing up for. You will get to know about all the terms and conditions put forth by the lender. If you do not agree to any of them, or you have any issues with any of the points mentioned therein, contact your lender. Talk to them for a solution before signing the document. 

Do not sign the document without reading the fine print as it may result in paying additional charges later on. You may miss out on some points and later on, as per the agreed document, you will have to pay the lender. 

Hidden Fees and Charges 

You pay interest on whatever money you borrow. Although you might not consider it a fee, the interest rate is typically how lenders generate money and cover their expenses. Other than interest, the main fees which may or may not be included in other personal loans are listed below:

• Late Payment Fee

Lenders impose one-time fees as a result of late payments made by a borrower. Additionally, failing to make loan payments on time will lower your credit score, making it more difficult for you to get loans in the future. Read your agreement or ask your lender about the percentage you will have to pay if you miss your repayments. 

• Set Up Fee

It is a one-time charge to cover the cost of managing a loan. It is also known as a product fee, admin fee, loan fee, and lender fee. Lenders may merely tack this onto your outstanding balance if you don’t want to pay this upfront.

• Early Loan Repayment Fee 

The majority of lenders will assure you that making extra payments or early loan repayment is not subject to fees. But borrowers may be charged up to two additional months’ worth of interest on any amounts paid in advance. Sometimes lenders provide this information in the fine print. 

Hence, read the fine print thoroughly when you are comparing your loan quotes and choose a loan that best suits your financial needs.  

Customer Reviews and Ratings 

Reading and assessing the customer reviews and the ratings they have given the lender is another thing that you must do while borrowing a personal loan. Existing or past customers can help you understand the type of lender you will be dealing with. If they have a bad experience with the lender, try to understand the cause and then do your own research to be on the safer side. 

Only mortgage lending and consumer lending are regulated aspects of lending. A lender will need to have Financial Conduct Authority authorization to carry out such operations in certain circumstances.

Let us understand how personal loan lending and borrowing is regulated in the UK. 

Consumer Rights and Protection 

Borrowers have rights under Consumer Credit Act, which is specially designed to protect consumers from being exploited by lenders or any other financial institution. So if as a borrower you face any issue with your loan or its repayments, there are different ways to tackle it. 

Financial Conduct Authority (FCA) Regulations 

Any company, not simply credit specialist firms, that offer credit or financing to customers must be authorised by FCA. If a lending company is not authroised by the FCA, please report it to the governing body and do not deal with such companies as you may become a victim of financial fraud.