Anthony Beachey
Holly Bennett
The basic legal requirements for a personal loan are that you must be over 18 and a UK resident.
Lenders will ask you to supply proof of ID and residency through documents, such as a driving licence, passport and recent utility bills.
But that’s the simple bit, and there’s of course more to it than that. Other considerations, chiefly your credit history, other debts you have and your income will also help lenders decide if you fit their criteria. Lenders have their own criteria, too. A high street bank, for example, might ask that you bank with it before it offers you a personal loan.
Your credit score and loan eligibility
Lenders will check your credit history and use your credit score to work out the risk of lending to you. Your credit score helps decide:
- whether you’re eligible for a loan
- how much you can borrow
- the interest rate you’ll pay
The higher your credit score, the more likely you are to be offered a loan and the lower the rate of interest will be.
Lenders in the UK use three main credit reference agencies: Experian, Equifax and TransUnion. These agencies use data from a range of sources, including lenders, utility suppliers and some publicly available information, to give you a credit score. For example, they might look at how long you’ve lived at your current address and whether you’ve had problems meeting repayments in the past.
If you’re refused a loan
Lenders can decline a loan application for many reasons, such as if you have recently been declined credit or have an outstanding county court judgment (CCJ). However, a lender may turn down your application because it doesn’t think you could afford the repayments.
If you’re refused a loan and aren’t sure why, you could check your credit report.
Even if you’re turned down for a personal loan, you may still be able to borrow money if someone agrees to be a guarantor for a guarantor loan. A guarantor promises to repay the loan if you’re unable to, which gives the lender added security. The guarantor should be clear about their obligations if you default before agreeing to this role.
If it’s an option, you might want to improve your credit score as your next step to increase your chances of being accepted and being offered low interest rates from a lender.
How can you check your loan eligibility?
Checking how likely your personal loan application is to succeed before you apply will be time well spent. It can make sure you apply to lenders that are most likely to accept you.
You can check your credit report with the three credit scoring agencies Experian, Equifax and TransUnion. They must provide you with a free statutory report, by law, and you can request this through their partner websites.
What you’re using the loan for can matter too. You will usually be asked what you are using it for. Lenders vary, but most won’t allow you to use a personal loan for business, investments, timeshares, buying property (including as a mortgage deposit), or gambling.
» MORE: How to check your credit score
Use a free loan eligibility checker
It could be worth using a free eligibility checker to see if you’re suited to the loan and to prevent too many applications that end in refusal. This runs a soft credit search on your credit record and suggests which loans you are likely to be eligible for without you making a formal application – and without affecting your credit score.
» MORE: Tips to make your loan application a success
What credit score do you need to get a loan?
The credit score that credit agencies give you helps the lender decide your loan eligibility. The better the score, the more likely you are to be accepted. But specific information on the report and your application will come into it too.
Lenders will look for a number of markers when they check your credit history. They will want to get a picture of how you have managed your finances in the past and will look for specific information, including:
- details of credit agreements
- financial links you have with other people
- missed payments
- county court judgments (CCJs) or decrees (Scotland), individual voluntary arrangements (IVAs) or bankruptcies
Each lender has its own credit score requirements. So, if one lender turns you down, another might offer you a loan. But make sure you don’t apply for too many in a short space of time.
When you apply for a loan, it shows on your credit record. If lenders see too many applications over a short period they may suspect you are struggling financially or are trying to borrow more than you can afford.
» MORE: What credit score do I need?
Is a personal loan a good idea?
You may want to consider a personal loan if:
- the repayments are affordable
- you’re not borrowing more than you need
- there aren’t other routes that might be more suitable or cost you less overall
As long as you’ve repaid previous debt on time and haven’t experienced other significant financial difficulties, it’s likely that you’ll be eligible for a personal loan.
But if you’re already struggling to meet your existing financial obligations, such as a mortgage or rent, think twice about taking out a personal loan. Some lenders will ask you to make sure you’ve considered the rise in the cost of living and how that may put a strain on your finances.
Pros and cons of a personal loan
Some advantages and disadvantages of borrowing money with a personal loan (rather than a credit card, for example) include:
Pros:
- The cost of borrowing may be lower.
- You may be able to borrow relatively large amounts for longer periods.
- You usually borrow money at a set interest rate, so you’ll know exactly how much you have to repay each month over the loan term.
Cons:
- There may be cheaper ways of borrowing. Other options could include a credit card (for short-term needs) or peer-to peer-loans.
- Personal loans tend not to be available for amounts under £1,000, or for periods of less than 12 months.
Personal loans are unsecured loans because you don’t need to use an asset, such as a house or car, as collateral with the lender. However, secured loans do use an asset, which means that the lender could take possession of the borrower’s assets if the loan isn’t repaid.
» MORE: Unsecured v secured loans
Do you need a loan?
Before you take out a personal loan, ask yourself if it’s necessary. You’re committing to repaying a loan over a number of years, along with the interest that will accrue, and during that time your personal and financial circumstances may change.
You need to be certain that you’ll be able to pay the money back. You might also consider how you would meet the repayments if you lost your income. You might be able to take out income protection or other insurance to cover that possibility, but that would add to the cost of the loan.
Also consider that the longer the term, the lower the monthly repayment, but the higher the overall cost of the loan will be. That’s because the longer the loan term, the more you pay in overall interest. If you can, aim to repay the loan as quickly as possible.
» MORE: Try our personal loan calculator
If you want to use a personal loan to consolidate other, more expensive debts and repay just one loan with one monthly payment, make sure it won’t be more expensive in the long run if you will have the debt for longer.
Before you take out a personal loan, always check whether you will face early repayment charges for paying off loans to consolidate your debts, and factor in any set-up fees for the new loan.
» MORE: Guide to the different types of loans
How can you improve your loan eligibility?
A straightforward way to help make sure you’re eligible for a loan is to check the lender’s requirements before you apply. While there is no guarantee you will be accepted, if you tick the boxes for its basic requirements you’ll be giving yourself the best chance of being accepted.
More generally, if you don’t have a good credit score, there are steps you can take to increase your chances of acceptance for a loan though these can take time to show on your credit report.
These include not applying for lots of loans over a short period of time, paying off other debts where you can, and paying bills in full and on time. Also, even small actions can make a difference, such as registering to vote.
» MORE: How to improve your credit score
Image source: Getty Images
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