What is a personal loan?
A personal loan, also known as an unsecured loan, is a way of borrowing larger sums of money then paying it back to the lender over an agreed period of time - typically between 12 months to 7 years. You'll repay interest on top of any money you borrow.
A personal loan is unsecured, meaning you're not putting any valuable possessions you own up as security or collateral against the debt.
How much can I borrow with a personal loan?
Typically, the most you can borrow with an unsecured loan is £25,000, although there are some circumstances where you may be offered higher amounts, like if you’re applying for a loan with a bank where you’re already a pre-existing customer.
The amount you'll be able to borrow will depend on your income and affordability.
When reviewing your application, personal loan lenders will check your income and weigh it up against any outgoings you have, such as rent and bills. If you have a low income and many outgoings, you're unlikely to be able to borrow large amounts.
Lenders limit how much you can borrow based on affordability. This is to make sure you can comfortably cope with the repayments.
How do personal loans work?
When you compare unsecured loans with Choose Wisely, here’s how it works:
- You'll first select how much you want to borrow and how long you want to take to repay the loan. Once you’ve done this, you’ll then fill in a few details about yourself and your financial circumstances.
- Once you’ve submitted your information, we’ll generate a list of the personal loans you’re most likely to be approved for based on the details you’ve given us. With this list, you’ll be able to compare each loan’s interest rates and the total amount repayable to help you choose the best loan.
- When you select the loan you want to apply for, you'll be redirected to the lender's website to apply directly with them. Once you've applied, the lender will perform a hard credit check on your credit history. This is where the lender reviews your financial history to see how well you’ve managed credit products in the past. Hard credit checks are recorded on your credit report, and having many in a short space of time can harm your credit rating.
- Once your application is approved, you'll receive your money. This will typically happen in a couple of days but could take as long as a week, depending on the lender.
- You'll start repaying the loan in monthly instalments. The amount you pay each month would have been agreed upon before you’ve received your loan. Over your repayment period, you'll pay back the amount you've borrowed plus interest and any additional fees.
How to get a personal loan
Before applying for an unsecured loan, it's worth using a comparison site to compare the loans you qualify for to find the best personal loans available to you. With a personal loan comparison site, you’ll be able to review lots of different loans from multiple lenders, helping you to find the best deals.
With Choose Wisely, you can also use our eligibility checker to see what loans you qualify for before applying. This prevents you from applying for loans that you may not qualify for, which can help protect your credit rating.
Once you’ve searched through all the loans that you’ve been accepted for in principle, you can choose which loan you want and apply for the one that fits your circumstances.
When you apply for a personal loan or use our eligibility checker, you'll need to provide a few details to support your application so the lender can determine your eligibility. These details include:
- Proof of identity. This can be a passport or UK driving licence, as long as they're valid and in-date. A bank statement under three months old will also help.
- Proof of residence. Something like a utility bill, mortgage statement, or water bill that includes your name and address will be able to prove your residence.
- Proof of right to live and work in the UK. If you have a UK passport, this will be enough, but documentation like an EU settlement statement or work visa will work if you don't.
- Proof of income. This can be a payslip, bank statements, or any other evidence of payment.
- Employer details.
These details are important because they help a lender understand your credit history and affordability. These two factors are crucial when it comes to deciding whether to approve you for a loan and on what terms.
Your credit rating is one tool that’s used to help lenders when deciding on whether you should be approved for a loan. For most personal loans, you'll need at least a moderate credit rating to be approved and get better rates. If your credit rating is poor, your loan application may be rejected. If not, a poor credit rating can lead to you being offered worse terms than advertised, which may lead to your loan being more expensive.
To help you get the cheapest personal loan possible, you can try to improve your credit rating by:
- Updating any outdated or wrong information on your credit report
- Registering to vote
- Utilising less than 30% of your credit limit on any credit cards
- Paying off any existing debts if you can
- Building a long credit history by keeping current accounts, credit cards and other credit accounts open
- Making repayments on time
Your affordability is worked out by taking your income and subtracting any regular outgoings you have, such as bills, rent, or mortgage payments. Your affordability can determine how much you'll be able to borrow.
If you have a good credit score but don't have a high enough disposable income, you still may not be able to get a loan for the amount you want.
Where is the best place to get a personal loan?
These days, one of the best places to get the lowest personal loan rates is online, using a price comparison website. This is because you can compare the loan market all at once to help you find the best personal loans for your individual circumstances.
Looking for personal loans online means it's also possible to check your eligibility to see if you qualify before applying.
The lender will perform a hard search on your credit report when you apply for a loan. Hard searches remain on your credit report, leaving a ‘mark’ that lasts 12 months. Applying for multiple loans at once will mean you’ll have multiple marks, which may put off future lenders and lower your credit rating.
Choose Wisely’s soft search eligibility checker can be used to reduce the number of loans you apply for. Our loan search lets you see which loans you’re most likely to be accepted for before you apply. This prevents you from having multiple hard checks performed on your credit report, protecting your credit rating.
Checking your eligibility can help you find the best personal loans available to you, and unlike a hard credit search, a soft search will not affect your credit score.
How long can you take a personal loan for?
Unsecured personal loans are long-term commitments, and the repayment periods can last between 12 months to 7 years.
Personal loans can last a long time, and because of this, you'll need to consider your future circumstances and be confident you'll still be in a financial position to make your repayments.
However long your loan lasts, be sure to budget for this time period so the amount you have to pay back is always accounted for in your future finances. A lot can happen in a year. Remember to factor in big life changes like getting married, having children and moving house.
What happens if you default on an unsecured personal loan?
Defaulting on a personal loan is when you miss a repayment. Once you default on your loan, your lender will get in touch with you and ask you to make the repayment. You may also be charged a late payment fee.
If you're still unable to pay or do not respond to the lender's request, they can take you to court and issue a County Court Judgement (CCJ) against you. A CCJ is recorded on your credit report, and having one negatively impacts your credit rating.
The lender may also sell your debt to a debt collection agency, which will reach out to you and request the money you owe. If you’re in this position and need help with your debt, services such as Money Helper can be useful.
If you still can't repay the loan after a CCJ, the lender may be able to obtain a warrant and send bailiffs to your home to collect your personal items that can be used to repay the debt.
To prevent this situation from happening to you, contact your lender as soon as you find yourself in financial difficulties. Lenders should be able to work with you to come to an arrangement that can ease the financial burden of your loan repayments. Communicating with your lender can help you avoid defaults and CCJs.
How long does it take to get approved for a personal loan?
The application process for an unsecured loan will usually take a few minutes to get through, and may be pretty swift as long as you have all the information you need.
Depending on the provider, you can be approved immediately, although it may take up to a day or more for your application to be processed.
Once approved, it’s possible to have the money in your account on the same day, although this can take up to a week with some providers.
What are the pros and cons of an unsecured loan?
- You can get your money quick, within days of being approved through most lenders
- You can choose how long you want to repay your loan over
- You can choose how long you want to repay your loan over
- You can spend the loan on anything
- They're a long-term commitment
- They have higher interest rates
- It's harder to borrow with poor credit
- Have huge penalties if you default on repayments
Unsecured personal loans FAQs
In theory, personal loans can be used to pay for anything, so it is possible to use a loan as a deposit on a house.
However, many banks and building societies will be cautious about where you're getting your money from when paying your deposit. If your deposit has come from a loan, your mortgage application may be rejected because you're already committed to another loan, meaning you may be overstretched and won’t be able to afford your mortgage repayments.
Nothing is stopping you from taking out multiple personal loans; however, it's important to remember that applying for various credit products in a short time could harm your credit rating.
If you apply for a personal loan while still repaying one, you may be deemed as being over-committed and could be rejected.
Personal loans can be used to help finance business expenses, but make sure it's allowed by your loan provider because some lenders will want your loan to be used for personal use only.
Using a personal loan for business purposes may not be the best option, because it ties your personal finances into your business, and you cannot borrow as much with a personal loan as you would a business loan.
If you use a personal loan and your business fails, you'll personally be responsible for repaying the loan, not the company itself. Keeping your business and personal finances separate can help protect you in these circumstances.
It may be possible to repay an unsecured personal loan early, although this won't be the case for all lenders.
If you can pay off your loan early, you'll likely have to pay an exit fee, so it’s worth considering your options carefully.