Things to know before getting a personal loan
Considering taking out a personal loan? We walk you through the pros and cons of borrowing money, and whether it’s the right choice for you, in our guide.
Wondering if you should get a loan? It’s important to make an informed decision before you apply. A loan can impact many different things, so it’s not something that should be taken lightly.
You might want to borrow money to cover the cost of a home renovation or to consolidate your outstanding debts into one monthly payment. Whatever your reason, there are advantages and disadvantages of personal loans to consider first.
We’ve put together a list of some of the things to know before applying for a personal loan. Read on to find out more.
Understanding your actual APR is important
APR stands for annual percentage rate and is the annual rate charged for borrowing. If you’re looking to take out a personal loan, finding a lower annual percentage rate (APR) could save you money during the overall loan period.
But remember, not all applicants will receive the rate advertised. When a personal loan is advertised using a Representative APR, it means that at least 51% of successful applicants will receive this rate. This means that up to 49% of applicants will not receive the advertised rate and may be charged a much higher APR (some may be lower). So, it’s essential to check the actual APR you’ll get before accepting a personal loan. Visit our Transparency page for more information.
We value transparency at Shawbrook Bank, so we don’t advertise loans with Representative APR. Instead, we use soft search to provide personalised quotes with a guaranteed rate, which means you’ll know exactly what rate you’re eligible for before making a decision. And there is no impact on your credit score. To find out more, read our guide: What is APR on a loan.
Your credit score may affect which loans are available to you
When you apply for a loan a lender will carry out a credit check to assess the level of risk they’re taking on by lending to you. Lenders will look at your credit score along with other information to decide whether you’re eligible for the line of credit you’re applying for. This information helps them to see how you’ve managed credit in the past and ensure that you can afford and manage the loan repayments.
When assessing your credit score you should bear in mind that Credit Reference Agencies (CRA’s) have different credit scoring profiles which can source different data meaning your credit score may be different depending which agency you use. Typically, a good credit score indicates that you are well placed to borrow money, and you’re more likely to be accepted. Your credit score alongside other checks is taking into consideration when a lender is assessing your application and the rate to offer you. So, you’re more likely to receive a loan with a lower interest rate if you have a good credit score.
Before applying for a personal loan, you might consider improving your credit score to get a better deal. Take a look at our guide and learn why it's crucial to make your monthly payments, as well as other tips on how you can maintain a healthy credit score.
Too many applications can hurt your credit score
Applying for a personal loan might impact your credit score…but it’s not always something to be concerned about.
When applying with some lenders, you won't know what rate you’ll be offered until after you've submitted your application. It can be tempting to apply for several personal loans to find the best offer. However, since credit applications leave a trace on your credit history, submitting multiple applications can harm your score. To find out more about hard and soft credit checks, read our ultimate guide to credit checks and searches.
If you’re thinking of getting a personal loan, it’s worth checking if you’re eligible before applying. At Shawbrook, we start with a soft credit check. This helps us to make a decision and provide a personalised quote that has no impact on your credit score. If you’re accepted, you’ll be able to check your quote and shop around before confirming your personal loan application. If you choose to go ahead, we'll then run a hard credit check before we pay out the loan.
Loans can be unsecured or secured
There are many different types of loans available, and they are divided into two groups: secured and unsecured.
Generally, personal loans under £25,000 – £30,000 are unsecured. This means that you won’t put forward collateral to borrow money. If you can’t pay back your loan, the lender will not be able to recover their money by any of your assets (typically your home).
The second type, a secured loan, means the debt is held against an asset you own, such as your property. If a lender offers a secured personal loan, you’ll need to put forward collateral or security first. With this type of loan, failure to pay could result in your home being repossessed.
It’s important to always consider the type of loan you’re taking out, and understand the term and conditions that apply with each.
Personal loans can often have fees
It’s important to remember that personal loans can come with additional fees. Before you borrow money, you should consider the extra charges as part of the loan’s terms and conditions. That way, you can avoid unexpected costs down the road.
For example, one of the common fee lenders can charge is the early settlement fee. If you wish to repay the loan early in a lump sum, you’ll usually have to pay a early settlement fee. This is either a fixed amount or a percentage of the loan amount. However, there are some provider who don’t charge early repayment fees. Make sure you read your loan agreement carefully before proceeding.
And what happens if you don’t pay a personal loan? If a payment is not made on time, some lenders may charge you a late fee. These are the most common additional fees associated with personal loans.
You should consider all additional charges when deciding whether a personal loan is the right choice for you. You should also look closely at the interest rate of your loan. This will give you a good idea how much money you’ll pay on top of the borrowing amount.
Do you need a loan?
Whether you’re planning on home improvements, debt consolidation or financing the wedding you’ve always dreamed of, you need to think carefully if a personal loan is the best choice for you.
We’ve covered some of the essential things to know before applying for a personal loan. Before you commit, you should also think about the purpose of the loan and whether you can afford to pay back the monthly instalments, then make an informed decision if it’s the right option.