The ultimate guide to personal loans

What is a personal loan?

Let’s start with the absolute basics.

A personal loan is an amount of money that a bank or another type of lender can provide to an individual – based on an agreement that the borrower repays the money back in instalments over a set term.

Loan repayments are usually a fixed amount paid every month on top of any interest.

So, if you agree to take out a personal loan of £9,000 with a term of 5 years – you’ll essentially pay that back in monthly instalments over the 5 years, with interest and associated fees.

The format really is that simple.

However, if you’re a novice when it comes to borrowing – there are lots of other things to consider when it comes to personal loans.

You’ll become more familiar with these as you continue reading on.  

What can a personal loan be used for?

This typically depends on the lender.

Many lenders have some restrictions on what a personal loan can be used for – so, it’s always worth double-checking with them beforehand.

But, essentially – personal loans could actually be used for a variety of different purposes.

For example, at Shawbrook, our personal loans can be used for:

• Cars/Vehicles
• Weddings
• Home Improvements
• Debt Consolidation

But, there are also certain purposes which we can’t lend for.

What we CAN Lend for

• Boat
• Touring caravan or motorhome
• Computer
• School/university fees
• Repay an overdraft
• Funeral
• Gift
• Hobby
• Top-up an existing loan
• Horse
• Medical bill
• Motorbike

What we CANNOT lend for

• Bridging loan
• Business related reasons
• Second property
• Plastic surgery
• Investment
• Static caravan or mobile home
• Buy out partner's interest
• Property purchase in the UK or abroad
• Purchase of shared ownership
• Income tax bill
• Christmas related expenses
• Gambling related expenses
• Repaying CCJs
• Borrowing on behalf of a third party

_{Note: Again, it’s worth bearing in mind that other banks/lenders will have their own policy for what they do and don’t allow you to borrow for, and that may differ from Shawbrook’s – so we’d always recommend finding out more before you apply.} 

What are the benefits of personal loans?

Like any other type of finance option, personal loans come with their own pros and cons.

Benefits of personal loans

• The application process is simple, and the money usually arrives in your account quickly once you’re approved. With a Shawbrook personal loan, you will receive the money within 3 working days of being accepted.
• Loan repayment terms are usually quite flexible but may depend on the loan amount borrowed and your personal circumstances.
• Loan repayments are in the form of a fixed amount to be paid monthly. This makes it easy to keep track of your monthly outgoings and budget.

Limitations of personal loans

• Some lenders advertise Representative APRs that might not actually be the rate you receive. (Read our Transparency Report to find out more about advertised APRs).
• Most lenders have restrictions on what you can and can’t borrow the money for.

How do personal loans work?

Personal loans work in a straightforward way – but there’s a fair amount of jargon and phrases that you might not be familiar with.

There are a number of factors that influence whether you’ll be approved for a loan, based on a set of criteria including:

1. The loan purpose (what the loan will be used for)
2. The borrowing amount (how much money you would like to borrow)
3. The loan term (how long you would like to borrow the money for)
4. Your credit score (a calculation based on your lending history and current financial circumstances)
5. A loan provider’s internal lending policy rules (the type of individuals they will lend to).

All of the above are taken into consideration, and if you’re accepted for the loan, the provider will offer you a rate at which they will lend you the money, which is called an APR or Annual Percentage Rate.

We’ve already covered the first 3 points above, so let’s take a look at APR and the important part it has to play in personal loans.

What is the APR?

APR stands for Annual Percentage Rate.

Basically, it’s the cost of borrowing money shown as an annual rate of charge, or the percentage rate of interest you have to pay for each year you spend paying the loan back. It takes into account the interest, any charges and other costs involved in getting the loan, which makes it easy to compare across the market. It can enable a borrower to compare APRs from different lenders, on a like-for-like basis.

Every personal loan borrowed has its own APR, and lenders usually offer different APRs to customers based on their internal criteria.

The first logical step for somebody looking to take out a personal loan is to shop around online to see what different lenders offer – but, be careful about judging your decision solely on advertised APRs. 

In personal loans advertising, lenders have to display their Representative APR, which is the APR that is offered to at least 51% of their successful applicants. The other potential 49% could end up getting a different rate to the Representative APR. It’s useful to bear this in mind if you’re applying for a loan based on the advertised Representative APR as  it’s not the ‘set-in-stone’ rate that you can expect to be offered once you’ve finished the application process; you could get a rate that’s higher or lower.

You’ll only be provided with your actual (personalised) APR once you’ve applied and been accepted for the loan, unless you get a quote from a lender that uses ‘soft’ credit searches.

What is a soft search?

A ‘soft’ search allows lenders to take an initial look at certain information on your credit file to help them decide if you would be eligible for credit and what rate you could get if you applied for it.

This is really important because unlike a ‘hard’ search, it doesn’t leave a mark on your credit file (known as a ‘footprint’) that other lenders can see, giving you the ability to shop around without any effect on your credit score.

At Shawbrook we undertake a soft search when you apply for a quote. This allows us to give you a personalised and guaranteed rate upfront so that you can make an informed decision on whether you would like to apply for the loan or not.

What is a hard search?

A lender will conduct a ‘hard’ search when you have decided to apply for the credit (as opposed to simply obtaining a quote). This is because the lender has to make a comprehensive assessment of your background and circumstances. A hard search will leave a footprint on your credit file that is visible to other lenders.

A hard search can have an effect on your credit score and can actually harm it if multiple hard searches are undertaken within a short space of time. However, if borrowing responsibly, there should be little or no impact on your credit score.

What is a credit score?

A credit score, also known as a credit rating, gives lenders an indication of what kind of borrower you are. Your personal credit score is calculated using the information on your credit report, such as how you’ve handled credit in the past and the amount of credit you currently hold. The lender will typically carry out a credit search to review your credit history and score.

Your credit score helps the lender to determine whether you can afford to take out a loan and if you’d be able to manage the monthly repayments.

Anyone can access their personal credit report – and there are a number of credit reference agencies available that enable people to do just that.

In fact, it’s a worthwhile exercise to consider before you jump straight into an application for a personal loan.

What could an example personal loan breakdown look like?

Let’s go back to the example we used in the first section.

You decide you would like to borrow the average loan amount of £9000 (reported by Moneysupermarket.com) with Shawbrook and you would like to repay the loan over 5 years (60 months). If you applied for a quote with Shawbrook, this is what your loan could look like:

*Note: All loans are subject to status. The APR you are offered could differ depending on the lender you choose to borrow from, their assessment of your financial circumstances and your chosen loan amount. Terms and conditions will also apply.

Your offer will be broken down with key information, like the above so it’s easier to understand.

What do you need to apply for a personal loan?

Essentially, there are a few standard pieces of information that you’ll need to start an application – although different lenders have different eligibility criteria (so bear that in mind).

Here are a few of the more general things that lenders usually take into account when you apply for a personal loan:

• Your credit history; usually the more favourable it is, the better.
• Your income and affordability of the loan; an acceptable level of income will vary depending on the amount you would like to borrow and the term. Lenders will also assess whether you are likely to be able to afford the loan repayments based on your income and current level of debt.
• Your age; some lenders will only consider your application if you are within a certain age bracket.
• Whether you have a UK personal bank account.
• Your residential status.

If you’ve got an interest in borrowing for a particular purpose that you’d like to explore in more detail, our ultimate guides are on-hand to provide even more relevant insight across financing weddings, cars, home improvements – and even using a personal loan to consolidate debts.