|Though the legal minimum age to apply for a personal loan is 18, some lenders require borrowers to be over 21. There may also be an upper age limit, which may vary depending on the loan term.
|A higher credit score generally indicates a lower risk for the lender. It reflects your credit history, including previous loans, credit cards, and whether you've paid them on time.
|Bankruptcy and CCJs
|Most lenders will not approve your application if you have been declared bankrupt or issued with a county court judgment (CCJ) in the past six years.
|Lenders typically look at your regular income to ensure that you have the means to repay the loan. You may need to provide proof of income and employment, such as recent payslips or tax returns.
|Debt-to-income ratio (DTI)
|Your debt-to-income ratio is an indicator of your ability to manage debt. A high ratio may indicate that you are overextended and may struggle to make loan payments.
|Reason for borrowing
|Lenders will consider the amount you wish to borrow and the purpose of the loan to assess whether it's reasonable and fits within their lending guidelines. For example, some lenders will not allow you to use a personal loan for a house deposit.
What Is a Personal Loan?
A personal loan is a sum of money borrowed from a bank, credit union, or online lender that you pay back in monthly instalments, usually with interest. The repayment term is usually fixed, with typical terms ranging from lender to lender.
Personal loans are typically unsecured, meaning they don’t require collateral: you don’t have to pledge an asset (such as your home or car) to secure the loan. Instead, lenders rely on the borrower’s creditworthiness and financial situation to assess the risk of lending.
There are two main types of personal loans available in the UK:
- For fixed-rate loans, the interest rate remains the same throughout the loan term, so you know how much you’ll need to repay every month. This is the more common type of unsecured personal loan in the UK.
- For variable-rate loans, the interest rate may change throughout the loan term. This means your monthly payments may increase or decrease, usually in line with the Bank of England base rate.
While taking out a personal loan is not the right choice for everyone, it can be a suitable option for those who wish to borrow a fixed amount of money for a specific purpose–for example, to fund a large purchase (e.g., a wedding) or cover emergency home repairs. Personal loans can also be used for debt consolidation (i.e., to pay off multiple debts, so that you only have to make one monthly payment in the future).
It’s important to be aware that failing to repay a personal loan as agreed can impact your credit score and may result in legal action being taken against you.
Exploring Other Borrowing Options
When it comes to borrowing money, personal loans aren’t the only option. Understanding the different types of loans can help you make informed decisions and choose the best product for your personal financial needs. Here are some potential alternatives to personal loans, and how they compare:
- Secured loans: these require collateral to secure the loan, such as a house or car. Lenders may offer lower interest rates and higher borrowing amounts for secured loans, but you risk losing your collateral if you stop making repayments.
- Guarantor loans: these require a third party, known as a guarantor, to co-sign the loan agreement. Guarantor loans may be more accessible to those with poor credit. However, your guarantor must agree to repay the loan if you are unable to.
- Credit cards: These allow ongoing borrowing up to a certain monthly limit, rather than a lump sum with a fixed repayment schedule. They typically have higher interest rates than personal loans, but may have low interest promotional offers.
- Payday loans: These are short-term, high-cost loans often used to cover temporary cash shortfalls. They are typically for smaller amounts and shorter terms than personal loans, with much higher interest rates.
To find the best credit or loan option for you, consider your unique financial situation and needs, and compare loan terms and interest rates from different lenders.