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TAKING out a personal loan could be a good way of spreading the cost of a big purchase – we round-up how to find the best rates currently available.
The best personal loans will help you fund a big purchase such as a car with affordable monthly repayments. Here is what to consider when finding the top personal loan rates.
What is a personal loan?
Most people have heard of a mortgage to buy a house with.
A personal loan is another form of credit that you can use for other major purchases.
This may include buying a car, paying for a wedding or to combine and clear credit card or other loan debts.
You can get a personal loan from a bank or building society, or there may be specialist companies such as peer-to-peer lenders.
How do personal loans work?
Similar to a mortgage, you need to apply for a personal loan from a provider.
You can usually do this direct online or through a comparison website.
Some lenders may let you apply on the phone or in a bank or building society branch.
The lender will want to know your income and how much you spend each month so they can work out whether you can afford a loan.
You will also need to provide your name, address and bank details.
A lender will do a credit check to assess your track record of repaying debts and they will look at your salary, income and how much you spend to see if you match their affordability criteria.
You can usually choose how much you want to borrow and how long for but a lender may have limits on this if they are unsure about your credit rating.
If approved, the lender will offer you a loan and set out the amount, the term, the interest charged and how much it will cost each month.
It will also tell you when the money will reach your account and there will be a set day each month that you must make repayments.
There is a 14-day cooling off period either from when the loan agreement is signed or when you receive a copy of it, whichever is later.
This gives you time to change your mind and any money received has to be paid back within 30 days.
There may be early repayment fees if you want to repay your loan before it is due so check the terms and conditions if you want to settle the debt sooner.
What is an unsecured loan?
The most common type of personal loan is an unsecured loan.
Unlike a mortgage, the loan isn’t secured against an asset such as your home.
A provider lends you money and you pay it back at the agreed rate of interest until it is repaid in full.
Your credit score is at risk if you fail to keep up with repayments.
That is pretty serious though as a poor score can make it harder to get other forms of credit such as a mortgage or credit cards in the future.
A lender could also take a county court judgement against you or you may be forced to declare yourself bankrupt.
There may also be late fees to pay.
What is a secured loan?
A secured loan is another form of personal loan.
It is secured against an asset, which is usually your home but could be another item such as your car.
Borrowers can usually borrow with a secured loan, typically up to £100,000 as there is a secured asset involved which gives lenders more comfort.
That is an added risk though as your home or another asset you have secured it against could be repossessed if you fail to repay.
Your credit score and the value of the asset will be considered when you make a secured loan application.
How much can I borrow?
The sweet spot for the best personal loans tends to be around £7,500 to £25,000.
That is the level where most lenders compare and compete with eachother on rates.
You can get personal loans below £7,500 but the cost of borrowing tends to be higher and in some cases it may be worth considering a credit card instead.
Some providers will offer cheap loans for between £30,000 to £50,000 but this varies among different companies.
Once you get beyond £50,000 it may be worth looking at secured loans but there may be other options such as remortgaging if you are a home owner.
How long can I take a loan out for?
Loan terms range from one to five years and sometimes can be for as long as seven.
The interest rate is the same however long you take the loan out for.
However, the more years you have on the loan the lower the monthly repayments.
This may make a loan more manageable, but you will pay more in total over the longterm as you are also paying interest for longer.
Can I increase my personal loan amount?
Some lenders may let you topup your loan if you want to borrow more.
This can be done by paying off your existing loan and taking out a new one worth more money.
There may be early repayment charges but you could end up paying a lower interest rate, although the repayments could be more as you are borrowing a larger sum.
Alternatively, you can keep your existing loan and just borrow the extra amount you want at a different rate.
This would mean keeping track of two different monthly loan repayments.
Are personal loans taxable?
There is no tax to pay on personal loans as they aren’t treated as income.
This is because they are a debt that you need to repay.
Can loans be transferred to another person?
Loan applications are considered based on your income and credit score, so a personal loan cannot usually be transferred to another person.
The rate and amount in your loan agreement is what the provider has decided is suitable for you so another person would have to do a separate application.
There is nothing to stop you making a joint application with someone else such as your husband or wife as this would boost your income and could increase the amount that you can borrow.
Can I get a personal loan with poor credit?
Cheap loans are usually only offered to those with a good or excellent credit rating.
This can make it harder to get one if you have bad credit, such as if you have a history of arrears or defaults, county court judgements or have previously been made bankrupt.
If you have a low credit score you may be offered a lower amount or be asked to pay a higher rate.
It can be easier to get a secured loan if you have poor credit, as the underlying asset provides extra security and boosts how much you can borrow.
Remember, too many applications can reduce your credit score further; so check what you are most likely to be accepted for first.
What if I need to borrow more than they’ll lend?
Lenders will have their own criteria on the maximum loan they will approve.
This will also depend on your income and credit rating.
If you can’t borrow as much as you had hoped, it may be worth taking steps to boost your credit score to improve your rating.
You can then apply another time and hopefully improve your chances of getting the best personal loan rates that match your requirements.
It may also be worth using other forms of debt such as a credit card, or a remortgage if you need access to more funds.
Don’t forget that lots of applications for loans and credit cards can affect your credit score, so it is best to do a soft search before applying.
What is a soft search?
As with any finance, applying for a personal loan can affect your credit score so avoid making too many applications at once.
Some comparison websites and providers will let you do a soft search first, which doesn’t show up on your credit report, to give you an idea of your chances of being accepted for best personal loans based on your needs.
Many providers also have calculators on their websites so you work out how much a loan will cost and whether you can afford it.
This is a better strategy to find the best loans as lots of applications and rejections could lower your credit score and deter financial providers, making it harder to get loans and credit cards in the future.
How to get a personal loan
Personal loans are offered by a range of banks, building societies and dedicated providers.
It can be time consuming to search each individual website for the best loan rates.
You could save time by using a comparison website that will let you compare deals by rate, term or the amount your want to borrow.
A comparison website may also be able to do a soft credit check, so you can see a range of loans that you are most likely to be accepted for.