Things you need to know before applying for a personal loan

A personal loan can help you to fund a big purchase or exciting project, allowing you to spread the cost across more manageable fixed rate monthly instalments.

Getting a personal loan can be a big financial commitment and isn’t something that you should go into without knowing the basics, though.

Before you hit the ‘apply now’ button, let’s look at some of the things you’ll want to cover to make sure a personal loan is the right option for you.

First things first, what is a personal loan?

A personal loan is money borrowed from a lender that is repaid monthly with a fixed term and rate of interest. With Novuna Personal Finance, you can borrow between £1,000 and £35,000 with competitive rates from as low as 6.9% APR Representative (£7,500-£25,000).

Fixed or variable rate?

Personal loans are typically fixed rate. This means the interest stays the same for the duration of your term, and your repayments will stay the same each month too. You’ll always know how much you need to repay each month and throughout the life of the loan. No nasty surprises.

Variable rates can change regularly, so your monthly payments may fluctuate over time. This makes it potentially tricker to manage your finances as you can’t always reliably predict what you need to repay each month. Our guide on personal loan interest rates goes into more detail.

Unsecured or secured?

Personal loans are normally unsecured, which means you won’t have to pledge your house or car as security. While this means your valuable assets can’t be repossessed by the lender, you should always keep up with your repayments as failure to do so will be recorded on your credit file. This could make it more expensive or even impossible to borrow in the future.

Looking for more information on all things personal loans?

Read our ultimate personal loans guide

Key questions you need to ask yourself before applying for a personal loan

1. What do I need a personal loan for?

It’s a good idea to know exactly what you want to borrow money for. This will help you decide whether a personal loan is right for you, versus other borrowing options such as a credit card or a secured loan.

A personal loan is typically most suitable for one-off purchases and planned projects. Its fixed-rate payments allow you to effectively manage your budget over time as you know exactly how much you need to repay and for how many months or years.

Alternative forms of borrowing include credit cards, which can be suitable for smaller purchases or emergency payments, or secured loans, which are typically more appropriate for significant purchases such as a house.

2. How much do I want to borrow?

Ask yourself how much money you need to make sure you’re applying to borrow the right amount. Take out a loan for too much, and you’ll end up paying interest on money you didn’t need to borrow or take out too little and you might not be able to achieve your goals as quickly.

How much money you can apply to borrow will largely depend on the lender. Here at Novuna, you can apply to borrow between £1,000 and £35,000 and spread the cost over 2 to 7 years.

It’s also worth remembering that the amount you’d like to borrow and the amount you’ll be able to get can be different things depending on your eligibility and creditworthiness. If you’re not able to get a loan for the ideal sum of money, you may need to apply for a different amount.

It could cost less in total to borrow more

Many lenders have an APR-based tier system, with smaller loans typically carrying a higher APR compared to slightly larger loans. That’s because smaller loans typically generate fewer earnings to cover the costs associated with servicing a loan.

You can use a loan calculator to see what headline rates a lender is charging across different loan amounts and terms.

3. How long do I want to borrow for?

The term of your loan will impact your monthly repayments and how much interest you pay overall.

To put it simply, if you borrow over a longer period of time, your loan repayments are likely to be lower but you’ll pay more interest overall. Borrowing the same amount over a shorter period may mean you’ll pay less interest in total, but your monthly repayments will be higher.

Take a step back and weigh up the pros and cons of paying back your loan quickly versus lowering your monthly repayment but ultimately having a loan for longer.

4. How much can I realistically pay back each month?

While a lender will base part of their decision on whether they think a loan is affordable for you, it’s vital you also do your calculations to make sure any repayments can fit comfortably within your budget.

Use our online loan calculator to get a rough idea of how much a personal loan could cost. You can then deduct the estimated monthly costs from the money usually left in your account after all other regular bills and expenses have been paid, to make sure you can afford the repayments.

Think about your long-term plans, too, and whether you expect any other financial obligations to come up before you’ve repaid the loan back in full.

5. How much will my loan cost in total?

Interest will be added to your total repayment amount, which can be viewed as the cost of borrowing money. You may also see interest rates displayed as APR (Annual Percentage Rate), which is the interest costs plus any additional charges or fees. In our case, as we don’t charge any additional fees, the APR and interest rate is the same.

Your interest rate will be impacted by both the amount and term. So you’ll need to consider how much money you need and how long you want to borrow for if you’re trying to work out how much a loan will cost each month.

It’s important to ask yourself how much you’re prepared to pay for the convenience of receiving the cash you need for your project or purchase upfront. An online loan calculator will give you a rough idea of how much a loan will cost, using the lender’s Representative APR (the rate given to at least 51% of customers). To get a personalised rate based on your own financial circumstances, you’ll need to fill out a full application form.

6. Is my credit report up to date?

Lenders will refer to your credit report when assessing your loan application. Not only will a good credit history show potential lenders that you’re reliable when it comes to repaying what you owe (which could increase your chances of acceptance), but you’re also more likely to get access to more competitive rates if your credit is good.

Before applying for a loan, it’s a good idea to get a free copy of your credit report and check the information on there. It should be up to date and free from any errors, accurately representing your history of managing debt.

Remember that your credit history changes over time, and there are several things you can do to try and improve your credit score to give you the best chance of being accepted for the loan you’re looking for.

7. What personal loan lender should I choose?

Research reputable lenders that are regulated by the Financial Conduct Authority (FCA). This will make sure the company abides by the FCA’s guidelines, prioritising responsible lending and acting in your best interests. Then, check their criteria to make sure they’ll allow you to apply for the amount of money you need over your preferred term.

While the APR you’re offered will undoubtedly impact your decision, you should also consider the service you’ll receive from your chosen lender. Here at Novuna Personal Finance, we’re well-known for putting our customers first – and have an average satisfaction score of 4.9 out of 5 from customers just like you.

Look out for additional benefits, too, such as the option to manage your account online or via an app (which is something we offer to all customers).

While it’s tempting to apply with lots of different lenders, it’s worth knowing that doing so many cause more damage than good. That’s because each application you make will be marked down as a hard search on your credit file, which can be a red flag to lenders. You may wish to use an online eligibility checker to compare loans instead, to see which you’re most likely to be accepted for without impacting your credit score.

8. Am I eligible to apply?

Check your chosen lender’s eligibility criteria before applying to borrow money. If you’re not able to meet those requirements, your application won’t be accepted and yet the application will still be marked down as a hard search on your credit file which could impact the decision of other lenders.

Remember, though, that meeting a lender’s eligibility criteria does not guarantee you’ll be accepted for a loan. Lending decisions are based on lots of different things, including your financial circumstances, your credit score, your loan amount and term.

Now for the final question

Once you’ve asked yourself the above questions, there’s just one more left… is a personal loan right for you?

Start your application now