Whether you’re looking to raise funds to purchase a new car, pay off some debts, or for some home improvements – a personal loan is one of the most cost-effective ways of borrowing money. However, with thousands of personal loan providers in the market, attempting to find the best deal for your individual needs is no easy feat. Ultimately, the underlying loan terms that you are able to get will be dependent on your credit profile. In other words, the better your credit score is, the lower your APR rates will be.
With that being said, we have created the ultimate guide to the best personal loans. Within it, we’ll cover everything that you need to know – such as what a personal loan is, how they work, and what you need to look out for before signing on the dotted line. To conclude, we will present three of the best personal loan providers currently active in the UK market.
Best 3 personal loan providers
So now that you have a firm understanding of what a personal loan is, who they are suitable for, and how much it is likely to cost you, you are now ready to begin the application process. Take note, there are literally thousands of personal loan providers now active in the UK market, so knowing which provider to go with can be challenging.
To help you along the way, we have listed the top three personal loan providers that are worth a closer look. Before we do, check out the following criteria that we used to rank the best providers.
Criteria used to rank the best personal loan providers
❓Lenders with the most competitive interest rates
❓How much the lender is able to offer
❓What credit score you need to obtain the personal loan
❓What loan terms are available
❓What the late payment and missed payment process is
What is a personal loan?
First and foremost, let’s make sure that we know what a personal loan actually is. In its most basic form, a personal loan is simply a loan that is taken out for a fixed period of time, at a fixed rate of interest. Often referred to as an instalment loan, a personal loan allows you to repay the funds back in instalments over a number of months. As such, they allow you to make large purchases that you would otherwise have been unable to pay for upfront.
In return for lending you the money, the underlying financial institution will charge you a rate of interest. As we will discuss in more detail further down, the amount of interest that you pay will depend on a number of factors – such as your credit score, your income, your current relationship with debt, how much you need to borrow, and for how long.
Here’s a quick example of how a personal loan works.
- You need to raise £10,000 to pay for some home improvements
- As you don’t have the money in your bank you decide to take out a personal loan
- You find a provider that is willing to lend you the money at an interest rate of 5% APR
- You decide that you want to pay the money back over the course of 6 years
- As such, you will make 72 equal payments of £161.05 over the 6 year period
- At the end of the loan term, you will have paid the entire £10,000 back – plus interest
- The total interest on the loan would have cost you £1,595.55
As you can see from the above example – taking out a personal loan comes with both its pros and cons. On the one hand, you were able to make a large purchase of £10,000 even though you didn’t have the funds at the time. Moreover, you could repay the loan over 6 years, meaning that your monthly payments amounted to just £161.05. However, in return for lending you the funds, the financial institution charged you a total of £1,595.55 in interest over the 6 years.
Am I suitable for a personal loan?
In a nutshell – unless your credit is completely dampened, most UK consumers will be eligible for a personal loan of some sort. The reason for this is that lenders will base your loan terms on your financial profile. For example, if you have a ‘good’ or ‘excellent’ credit score, not only will you benefit from super-high approval rates, but you will also benefit from some of the lowest APR rates in the market.
On the contrary, if you have a ‘poor’ or ‘very poor’ credit score, then you will be limited in who you can borrow funds from. By this, we mean that you might need to use a specialist bad credit lender that is willing to lend funds to those with a less than ideal credit profile. However, this comes at a cost, as you will likely pay a much higher rate of interest in comparison to those with a healthy credit score.
Personal loans: Secured vs Unsecured
It is important to note that there are actually two main types of personal loan options out there for you – secured and unsecured. It is crucial that you understand how the two terms differ, as it will dictate whether or not you need to put your personal assets up as collateral in order to obtain the loan.
Here’s a quick breakdown of what you need to know.
✔️ Unsecured Loan: An unsecured loan is simply a personal loan that does not require you to put any of your assets up as security. This is the safest type of loan type out there, not least because you will not face the risk of losing your assets in the event of default. As long as your credit score is not too damaged, you should have no issues obtaining an unsecured loan.
✔️ Secured Loan: At the other end of the spectrum, a secured loan will require you to put up an asset as collateral in order to obtain the loan. For example, the lender might ask that you put your house or car up as security before releasing the funds. If you do – and you end up defaulting on the loan, then the lender will have the legal remit to seize the asset from you to cover the outstanding balance.
How much do personal loans cost?
As we briefly noted earlier, the cost of your personal loan will be based on the amount of APR that you pay. However, it is also important to note that other costs might come in to play – such as an origination fee. Moreover, if you end up missing a payment, this is likely to come at a financial cost, too.
With that being said, here are some of the main costs that you need to make considerations for when taking out a personal loan.
APR – Interest
In the vast majority of cases, your personal loan will come with an APR rate. This is the amount of interest that you will end up paying each year. Even if your personal loan is based on a term of less than 12 months, the APR rate will still be expressed as an annual cost, albeit, the specific amount that you pay will be smaller. Attempting to understand how the APR rate is calculated is no easy feat, which is why lenders are required to break this down for you in Layman Terms so that you have an understanding of how much the loan agreement is actually costing you.
As you’ll see from the above image, the APR rate takes into account the interest paid over the life of the loan, the number of days in the loan term, and of course – the loan amount. It is also important that you assess whether the APR is fixed or variable. While in the vast majority of cases the interest rate will be fixed, some lenders offer a variable rate. If this do, this means that the interest rate can change at any time.
The second cost that you need to look out for when taking out a personal loan is that of the origination fee. For those unaware, this is a fee charged by the respective lender for arranging the loan. The origination fee is paid in addition to the amount that you receive, and can range from just 0.5%, up to a whopping 5%. Much like in the case of your APR rate, the size of the origination fee is often determined by your underlying credit profile. As such, the better your credit score, the less you will pay.
Here’s an example of how the origination fee works in practice.
- You take out a loan for £5,000 to pay for a new car
- The loan comes with an origination fee of 3%, which amounts to £150
- As such, when the lender transfers the loan funds across, the £150 will be deducted
- This means that you will receive £,4850, even though the size of the loan is £5,000
As you can see from the above example, you will be required to pay back £5,000 + your APR rate, even though you will only receive £4,850. This is why you should try to stick with lenders that either charge a very small origination fee, or no origination fee at all.
Missed payment and late payment fees
If you are taking out a personal loan, then it is hoped that you are doing so because you are confident you will always make your repayments on time. However, life can often throw unexpected events our way and thus – there might come a time where you fall behind on your loan. If you do, not only can this lead to financial penalties, but it is also likely to have a negative impact on your credit score. As such, you need to make some considerations regarding the fees charged by the lender if you miss a payment.
In this sense, there are two types of consequences that you need to assess – a late payment and a missed payment. Although some consumers think that the two are the same, they are not. Here’s the difference between the two:
✔️ Late Payment: A late payment is a term used to describe a payment that is slightly late. For example, let’s say that your monthly repayment date is the 5th, whereby you are required to pay £200 off your balance. However, due to unforeseen circumstances, there wasn’t enough money in your bank account to cover the payment. In order to rectify the problem, you call the lender on the 7th to make a payment with your debit card. As the payment was made just 2 days after the scheduled payment date, this is simply a late payment, as opposed to a missed payment.
? Whether or not the lender charges you a fee for a late payment will vary from lender-to-lender. Essentially, some do and some don’t.
? If the payment is late, as opposed to missed, then in the vast majority of cases this will not be reported to the main three credit rating bureaus. As such, it probably won’t hurt your credit score.
✔️ Missed Payment: On the contrary, a missed payment is much more severe than a late payment. There is no hard and fast rule as to the specific time period that turns a late payment into a missed payment, although the industry average is around 30 days. In other words, if you fail to settle your late payment before your next repayment date, then this is likely to turn into a missed payment.
? You can be all-but-certain that the lender will charge you a missed payment fee. The amount will be added to your outstanding balance, meaning that the fee will have interest applied to it.
? The missed payment will also be reported to the main three credit rating agencies. This will have a negative impact on your credit score, and future lenders that you borrow funds from will be able to see this. As such, it will impact your ability to obtain credit at competitive APR rates.
Can I get a personal loan if I have really bad credit?
Due to the sheer size of the online lending space, there are now personal loans for all credit profiles. If your credit is really bad, then it's likely that you will need to use a specialist lender. As a result, the underlying APR rate is likely to be much higher in comparison to somebody with a healthy credit score.
What are the benefits of a personal loan?
The main benefit of taking out a personal loan is that you get to make a large purchase upfront even if you don't have the required funds yourself. You then get to spread your repayments over many months or years, which can make personal loans an affordable option.
Why does the APR rate increase when I borrow the funds for longer
The personal loan space is all about risk. As such, the longer that you have to repay the money you borrowed, the more chance there is that you will one day default. This means that lenders need to increase the APR rates on longer loans as a means to counter the risks of non-payment.
How long does it take to apply for a personal loan?
As lenders are now able to verify your personal information electronically with third-party sources, some loan applications can be approved within 15 minutes. However, if the lender requires more information from you - or they need you to provide supporting documentation, it can take longer.
Should I opt of a secured personal loan or an unsecured personal loan?