There are many reasons you may be considering taking out a personal loan. Perhaps you want to add value to your home with an improvement project, need a new car for travelling to work, or want to consolidate debts. Whatever the reason, there are some things you definitely need to know before you take the plunge and sign on the dotted line.
Here are 7 questions you should ask before taking out a personal loan. It’s well worth reading the Which guide, Personal loans explained.
1. What is the loan for?
Be clear about what the loan is for. Car loans, for example, often have lower interest rates than other unsecured personal loans because the lender will use your car as security against the loan. This means that if you default on your loan payments the lender can take the car from you to recover the debt.
Personal loans can be used for a variety of purposes, but some lenders restrict how the loan can be used. You’ll need to check lender restrictions when you do your research.
2. Will taking out a loan damage my credit score?
Making multiple loan applications with lenders who use ‘hard’ credit checks could leave a mark on your credit file. This could mean you miss out on lower interest rates on loans you take out in the future, especially if previous applications have been unsuccessful.
Check out The Guardian’s guide on how to find the best personal loan without damaging your credit rating.
Also, check out your credit score before you start applying for loans. You can get regular updates and free access to your credit score on these websites:
You may want to work on improving your credit score before applying for a loan.
3. Do you meet the lender’s requirements to take out a loan?
All lenders will have a set of criteria to determine whether or not they will lend to you. The most common reasons for loan application rejections are:
- Bad credit history
- Unemployed or insufficient income
- Unstable employment or lack of employment history
- Restrictions on purpose
- Inconsistent details
- You already have loans and other debts
4. Can I get a loan if I have a poor credit rating?
If you have a poor credit rating and can’t get a personal loan through your bank, a guarantor loan might be an option. Typically, interest rates will be higher for a guarantor loan (anything from 29 per cent APR to 55 per cent APR) and you will need someone over the age of 21 who owns property in the UK to act as a guarantor for you. This means they will have to pay back the loan on your behalf should you default.
Sites like, Guarantorloansuk, offer a comparison tool to help find guarantor loans with the best interest rates for your circumstances.
It is always best to avoid payday loans and doorstep loans, which have extortionate interest rates and can reach as much as 1,575 per cent.
5. What are the interest rates, and are there any fees or hidden extras?
The interest rate on a loan is the amount of money charged on top of the money loaned. Ideally you want to choose the loan with the lowest interest rate possible, but also look out for fees and hidden extras.
Lenders must show the APR for any loans. The APR takes into account any fees and charges, as well as the interest rate. The APR is the rate you should use to compare loan deals. Also, be aware that some loans have variable interest rates, which means monthly repayments could go up, as well as down. All loans will have fees, but look out for:
- Arrangement fees
- Early repayment penalties (should you decide to pay off your loan early)
- Your lender may try to sell you payment protection insurance (PPI)
6. How much can I borrow?
The amount you can borrow will depend on your circumstances and your credit score. Generally, the more you borrow, the lower the interest rate. Traditionally lenders would lend up to £25,000, but recently the ceiling on personal loans with some lenders has leapfrogged. First Direct has just launched jumbo-sized personal loans, allowing customers to borrow as much as £50,000.
7. What is the term of the loan and can you afford to pay it off?
Always carefully consider the term of the loan (this is the amount of time/years you will spread the repayment across). You will need to balance this with the cost of the monthly repayment to ensure the amount you have to repay each month is affordable. Responsible lenders, such as banks and building societies, should carry out an affordability assessment to determine your ability to repay the loan as part of their lending criteria.
If you are struggling with finances, it is always best to seek impartial advice before taking out a loan. You can get free debt advice from the Money Advice Service.