Most of us will need to apply for bank loans at some point in our lives, whether it's to fund a necessary purchase, help pay for an expense you hadn't planned for, or just to provide a bit of breathing space when you need to borrow money on a short-term basis. You can make the whole process a lot easier by following a few simple suggestions - here are our top ten tips for getting a personal loan.
1. Check your credit rating
Your credit history and consequently your credit rating will play a significant part in your application for personal loans, as the rate of interest (APR) applied to your borrowing and whether or not you'll be offered a loan in the first place will be largely determined by your past credit behaviour.
If you are seen as a 'high-risk' borrower - if you have a history of defaulted payments and CCJs (County Court Judgements) for example - it's likely that the loan deals you're offered will have a higher APR as they're specifically designed as loans for bad credit borrowers.
This is why it's important to check your credit rating before applying if you want to make sure you're eligible for cheap loans. You can do this online through the 3 main credit reference agencies in the UK, Experian, Equifax, and Callcredit, though you may be charged a fee to view your credit record.
By checking your credit report you can make sure there aren't any mistakes that might adversely affect your scoring, and also get more of an idea of what to expect when it comes to applying for credit. It is also possible to improve your credit rating ahead of applying for a loan.
2. Look beyond the headline rate
When looking into taking out secured loans or unsecured loans you will see a 'representative APR' advertised, which means the interest rate that the bank or building society makes available to loans taken out by at least 51% of borrowers.
You should also be aware that most providers will only apply their headline rate to loans of a certain amount - many specify a lower and upper borrowing limit for which the advertised rate of interest will apply so it's important to check this out.
For this reason it's crucial to find out how much your loan will cost according to how much you need to borrow. You can do this by reading the small print or using a loan calculator which can be provided by your lender, or alternatively you can find out the cost of your loan yourself online.
A word of warning however - avoid getting quotes from lenders for lots of loans around the same time, as this can negatively impact your credit rating. This is because it will make it appear like you are very much in need of credit, and therefore more a of a 'high-risk' borrower and one that should only be granted poor credit loans. Instead it's best to use a loans repayment calculator to give you an idea of the likely cost before you apply.
3. Shop around
When applying for a loan, or any financial product for that matter, it's vital to compare what's on the market to find a deal that's right for you.
When you compare loans, it's vital that you look beyond the top 10 loans available and compare loan rates and likely cost for the amount you need to borrow from all the loan providers out there.
You will need to look at the representative APR quoted as this will incorporated the cost of the loan including the interest rate and any charges. This representative rate however will only be offered to an average of 51% of borrowers, and may only apply to a fixed amount of money. So look for a loan that offers the cheapest rate possible for the amount you need.
Also remember to check the application criteria before you apply to make sure you're eligible, as loan providers will often restrict their loan's availability to those with a fair credit rating. Secured loans for bad credit, unsecured personal loans for bad credit and even debt consolidation loans for bad credit are available however.
4. Consider alternatives to loans
Depending on how much you wish to borrow, you may benefit from taking out a credit card that offers interest-free purchases instead of a loan. This could particularly be the case if you are only looking to borrow a small amount, for example £500-£1,000, as everyday loans this small will often attract the highest rates of interest.
By taking out a 0% purchases card instead, you can borrow the amount you need (providing your credit limit stretches to this) without being charged interest, as long as you pay off the balance before the introductory period is up. This can be much more cost-effective than taking out a personal loan if you only need a small amount.
Remember not to use your new credit card for anything other than the original amount you need to borrow.
Make sure it is completely cleared before you start to be charged interest on your debt.
To make this easier it could be worth setting up a direct debit from your current account to your credit card, to make sure a portion of the balance is paid off automatically each month until it is cleared.
Make sure that minimum repayments are kept up until the balance is paid off.
Make sure you get a card with a long enough interest-free term for you to pay the whole amount off, otherwise this isn't a realistic option, and you may be better off going with a low standard rate credit card.
5. Avoid payday loans if you can
If you're in need of a loan and require funds quickly, it can be tempting to take out what's known as a 'payday loan'. This type of loan is usually offered on a very short term basis, under the guise of lending you enough money to see you through to payday. However, while they can sound tempting if you're short of cash you should avoid them if at all possible.
The problem is that the vast majority of payday loans will apply an extortionate rate of interest on to your borrowing. This means that you are likely to end up paying out far more than the amount you borrow, just to see you to the end of the month. For this reason, they're best avoided.
6. Loyalty doesn't always pay
When taking out a personal loan, going directly to your own bank might seem like the most obvious thing to do, as they know you as a customer and may have offered you similar financial products in the past. However, being loyal to your bank doesn't always mean that you'll be rewarded with the best deal.
Loyalty in the world of finance rarely pays, as you may well be offered a better deal on your loan - for example a lower APR or flexible terms on repayments - by a bank that is welcoming you as a new customer. This is another reason why shopping around and comparing what's available to you is a must before you apply for a loan or any other financial product.
7. Take the term into account
An important aspect of your loan will be how long you are given to pay it off; this is known as the loan term. You'll need to be aware that the longer the term, the more expensive your loan will be overall as you will be paying interest for a longer period of time.
For example, if you took out a £5,000 loan with an APR of 8% and a term of 5 years, you would be paying £400 per year for 5 years - adding up to £2,000 overall in interest alone. Conversely if you took the same loan for 2 years, you'd be paying £800 in interest
It comes down to a balance between paying off your loan quickly and spreading your repayments more thinly.
If you choose to pay off your loan quickly you'll no longer have any debt accruing interest, but you may not be able to afford the repayments necessary to do this. On the other hand if you make smaller repayments they will be easier to manage, but the life of the loan will be longer and so more interest will be added overall.
Before applying for a loan, make sure to work out how much you will be able to pay back every month, so that you can agree a loan term that suits your budget.
8. Fix your rate
It's usually best to opt for a loan that applies a fixed rate of interest to your borrowing. This means that the rate at which interest will be applied to your borrowing debt, and more importantly the amount you will need to pay back stays the same throughout the life of your loan.
By taking out a loan that applies a fixed rate rather than a variable one that could rise at any point during your loan term, you'll have the peace of mind of knowing exactly how much interest you'll be charged each month and overall, and can budget accordingly.
Most unsecured loans nowadays will offer fixed rates, but it is important to check the small print before applying so that you are certain of what your interest rate will be, and how long it will stay fixed for.
9. Don't automatically take out PPI with your loan
By all means if you would rather have the reassurance of PPI (Payment Protection Insurance) on your loan then take it out, but it's likely to be much more cost-effective to shop around for your PPI policy rather than accepting it as an add-on to the cost of your loan.
PPI protects you if you become unable to repay your loan because of a loss of income, and will cover loan repayments if this is the case. For this reason it can be a good idea for those who want the peace of mind that whatever happens, the loan will be paid off, although it is by no means an essential.
However, make sure to shop around first before you buy. It's likely to be much more cost-efficient for you to get a single, independent policy that covers all of your outgoings instead of accepting the first quote you are given from your lender.