What is a personal loan?

A personal or ‘unsecured’ loan is a type of loan that isn’t secured against an asset such as a vehicle or property. While this makes personal loans less of a risk to you, it also means there may be a limit on how much you can borrow.

Your credit history plays two key roles in getting a personal loan. First, the credit check plays a big part in whether your application is approved by the lender. And second, your credit history influences the unsecured loan rates you’re offered and whether you’re able to access cheap loans.

This is in contrast to secured loans, where the amount you borrow is secured against an asset you have such as a house or a car. This provides your lender or bank with security in case you default on your loan repayments.

Compare loans

Ideally, you want a long with a term that’s long enough to keep the fixed monthly payments affordable, but which doesn’t lock you into paying interest for longer than you need. Once you have found loans that suit those criteria, choose the one with the lowest interest rate.

Fill out a loan application

Once you’ve selected the loan you want, it’s time to apply. Click the “Check my eligibility” button next to your chosen loan and complete the form. The lender will then carry out a credit check to see if you can afford to pay back the loan. This process can take up to a week.

Receive funds

If the lender approves your application, all you need to do is accept the agreement terms and then wait to get the funds. It typically takes between one and five days for the money to be transferred to your bank account.

What is a credit check?

When you apply for a loan, lenders will carry out a credit check. That means they look at your credit record to see your financial history. When it’s done in connection with an application for credit, it’s called a hard credit check. Your credit record logs how much credit you’ve taken out and whether you’ve made payments on time, or missed payments. Based on that and other affordability calculations, they’ll decide whether you’re a responsible borrower and can afford to repay the loan.

How to find the best unsecured loans

As with all borrowing, finding the best loan will depend on your financial and personal circumstances.

To find the best deals, you need think about a few key things before you apply for a loan:

  • How much you want to borrow. The amount you need to borrow will dictate the interest rate you are offered and even if you’ll be approved for a personal loan.

  • How long you need to pay it back. The longer you take to repay the loan, the lower your monthly payments will be. But that also means you end up paying more in interest over the course of the loan term.

  • How much you can afford to repay each month. As mentioned, personal loans rely on your credit score and missing payments can damage your ability to get credit it in the future. So knowing how much you can put aside every month to cover the repayments is an important factor.

To get the best unsecured loan deals, compare as many loans as you can so that you know what’s available in the market.

As with all borrowing, finding the best loan will depend on your financial and personal circumstances.

To find the best deals, you need think about a few key things before you apply for a loan:

  • How much you want to borrow. The amount you need to borrow will dictate the interest rate you are offered and even if you’ll be approved for a personal loan.

  • How long you need to pay it back. The longer you take to repay the loan, the lower your monthly payments will be. But that also means you end up paying more in interest over the course of the loan term.

  • How much you can afford to repay each month. As mentioned, personal loans rely on your credit score and missing payments can damage your ability to get credit it in the future. So knowing how much you can put aside every month to cover the repayments is an important factor.

To get the best unsecured loan deals, compare as many loans as you can so that you know what’s available in the market.

Understanding personal loan rates

It’s important to remember that the actual personal loan rates you are offered will be the lender’s decision after assessing your eligibility.

Every lender has its own criteria for what credit score you need to be accepted for their personal loans. That’ll affect whether they’ll give you an unsecured loan and what APR (annual percentage rate) they offer.

How much does a personal loan cost?

If your lender thinks you’re at risk of missing your repayments, you’ll be charged more for your loan. Some of the factors that affect the cost of your loan include:

  • How much you borrow: The more you borrow, the higher your monthly repayments will be

  • How long you borrow for: Short-term loans may come with a higher monthly cost, as they often charge more interest than longer-term loans

  • Your credit history: You might pay more interest if you have bad credit

  • Your income: If your income is low, you might be charged a higher interest rate

Did you know?

Total unsecured debt – excluding credit card debt – in the UK amounted £198 billion at the end of January 2022. That averages to about £3,743 per adult¹.

What can I use an unsecured personal loan for?

Unsecured personal loans are often used for making a big purchase, or for home improvements. But you can use the money however you like, as long it’s not specifically excluded in the loan agreement.

Is there anything else I need to know before applying for a loan?

Before you apply for a personal loan, it’s essential you understand the risks involved. When you apply for a loan, a lender will perform a hard credit check and if this is rejected, this could further damage your credit profile.

It’s also important you assess whether you can confidently afford the loan you’re applying for. If you don’t make your repayments on time, you risk damaging your credit score and your ability to get credit in the future.

You can use our loan calculator to help you work out what your repayments could look like and work out a budget from this to see if a personal loan is a feasible option based on your financial situation.

If you’re concerned about your credit history, you could also use our eligibility checker at the top of this page. It uses a soft check so doesn’t affect your credit history but gives you an indication of loans you may be eligible for.

Finally, seriously consider how much you need to borrow and how long to borrow for.

Generally loans taken over a longer term cost less in monthly repayments, but will cost you more in total due to the interest you’ll pay. If you choose a shorter term, you will likely pay more each month but less interest overall.

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