Taking out a personal loan can be a great way to spread the cost of a large purchase – we bring together how to find the best rates currently available.
The best personal loans will help you finance a big purchase like a car with affordable monthly payments. Here’s what to consider to find the best personal loan rates.
What is a personal loan?
Most people have heard of a mortgage to buy a house.
A personal loan is another form of credit that you can use for other large purchases.
This can include buying a car, paying for a wedding, or combining and writing off credit card or other loan debts.
You can get a personal loan from a bank or mortgage company, or there may be specialist companies such as peer-to-peer lenders.
How do personal loans work?
Similar to a mortgage loan, you need to apply for a personal loan from a provider.
You can usually do this directly online or through a comparison website.
Some lenders may allow you to apply over the phone or at a branch of a bank or mortgage company.
The lender will want to know your income and how much you are spending each month in order to determine if you can afford a loan.
You will also need to provide your name, address and bank details.
A lender will perform a credit check to assess your debt repayment history and look at your salary, income, and how much you spend to see if you meet their criteria for affordability.
You can usually choose how much and for how long you want to borrow, but a lender may have limits on this if they are unsure of your credit rating.
If approved, the lender will offer you a loan and state the amount, term, interest charged, and how much it will cost each month.
It will also tell you when the money arrives in your account and there will be a set day each month that you will need to make repayments.
There is a cooling off period of 14 days from signing the loan agreement or receiving a copy of it, whichever is later.
This gives you time to change your mind and any money received must be refunded within 30 days.
There may be a prepayment charge if you want to pay off your loan before it is due, so check the terms and conditions if you want to pay off the debt early.
What is an unsecured loan?
The most common type of personal loan is the unsecured loan.
Unlike a mortgage, the loan is not secured by an asset such as your house.
A provider lends you money and you pay it back at the agreed interest rate until it’s fully repaid.
Your credit score is at risk if you don’t meet your repayments.
This is quite serious, as a bad score can make it more difficult to obtain other forms of credit such as a mortgage or credit cards in the future.
A lender could also take a county court judgment against you or you could be forced to file for bankruptcy.
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 by an asset, which is usually your home, but could be something else such as your car.
Borrowers can usually borrow with a secured loan, usually up to Â£ 100,000, as there is a secured asset that gives lenders more convenience.
This is an added risk, because your home or other property you have secured it against could be repossessed if you do not pay back.
Your credit score and asset value will be taken into account when you apply for a secured loan.
How much can I borrow?
The sweet spot for the best personal loans tends to be between Â£ 7,500 and Â£ 25,000.
This is the level where most lenders compare and compete on rates.
You can get personal loans for under Â£ 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 offer cheap loans between Â£ 30,000 and Â£ 50,000, but this varies by company.
Once you get past Â£ 50,000, it may be worth considering secured loans, but there may be other options such as refinancing if you are a homeowner.
How long can I take out a loan?
Loan terms vary from one to five years and can sometimes be up to seven years.
The interest rate is the same regardless of the length of the loan.
However, the more years you have on the loan, the lower the monthly repayments.
This can make a loan more manageable, but you will pay more in total in the long run because you are also paying interest for longer.
Can I increase the amount of my personal loan?
Some lenders may allow you to top up your loan if you want to borrow more.
This can be done by paying off your existing loan and taking out a new one that is worth more money.
There may be a prepayment charge, but you could end up paying a lower interest rate, although repayments may be higher because you borrow more.
Alternatively, you can keep your existing loan and simply borrow the additional amount you want at a different rate.
This would mean keeping track of two different monthly loan payments.
Are personal loans taxable?
There is no tax payable on personal loans as they are not treated as income.
It is because they are a debt that you have to pay off.
Can loans be transferred to another person?
Loan applications are reviewed based on your income and credit rating, so a personal loan usually cannot be transferred to another person.
The rate and amount on your loan agreement is whatever the provider decides is right for you, so someone else will need to apply separately.
Nothing prevents you from making a joint application with someone else like your husband or wife as this will increase your income and may increase the amount you can borrow.
Can I get a personal loan with bad credit?
Inexpensive loans are generally only available to people with good or excellent credit scores.
This can make it harder to get credit if you have bad credit, such as if you have a history of arrears or defaults, county court judgments, or if you’ve ever filed for bankruptcy.
If you have a low credit score, you may be offered a lower amount or asked to pay a higher rate.
It may be easier to get a secured loan if your credit is poor because the underlying asset provides additional security and increases the amount you can borrow.
Remember that too many requests can further reduce your credit score; so check what you are most likely to be accepted for first.
What if I need to borrow more than they lend me?
Lenders will have their own criteria on the maximum loan they will approve.
It will also depend on your income and your credit rating.
If you can’t borrow as much as you hoped, it may be helpful to take steps to increase your credit rating to improve your credit rating.
You can then apply again and hopefully improve your chances of getting the best personal loan rates for your needs.
It may also be worth using other forms of debt, like a credit card or remortgage if you need to access more funds.
Keep in mind that many loan and credit card applications can affect your credit score, so it’s best to do some preliminary research before you apply.
What is a soft search?
As with any finance, applying for a personal loan can affect your credit score, so avoid applying too many at once.
Some comparison sites and providers will allow you to do a soft search first, which does not appear on your credit report, to give you an idea of ââyour chances of being accepted for the best personal loans based on your needs. .
Many providers also have calculators on their websites so you can figure out how much a loan will cost and if you can afford it.
This is a better strategy for finding the best loans, as many requests and rejections could lower your credit rating and deter financial service providers, making it more difficult to obtain loans and credit cards. in the future.
How to get a personal loan
Personal loans are offered by a range of banks, mortgage companies and dedicated providers.
It can be tedious to search every website for the best loan rates.
You could save time by using a comparison website that will allow you to compare offers by rate, term, or amount you want to borrow.
A comparison website may also be able to perform a gentle credit check, so that you can see a range of loans for which you are most likely to be accepted.