Personal loans: a complete guide

A personal loan gives you the opportunity to borrow the money you need and pay it back over a set timeframe. It can be a good way to achieve your dreams sooner and you won’t need to dip into your nest egg or wait to save up before you can buy the things you want.

As with all financial products, applying for a loan is a big decision and it’s important to know the ins and outs of how a loan works before diving in. That’s why we’ve pulled together everything you need to know.

In this ultimate guide, we’ll cover:

• How personal loans work
• What personal loans are used for
• How much you could borrow with a personal loan
• How much a personal loan might cost
• How long personal loans take to process
• How personal loan interest works
• The difference between unsecured and secured loans
• How debt consolidation works
• Personal loans vs credit cards
• How applying for a loan could impact your credit score
• How a personal loan could impact your mortgage
• Our personal loan eligibility criteria
• How to manage your loan
• Applying for a loan

Let’s get stuck in, shall we?

What is a personal loan?

Personal loans are a form of unsecured finance which gives you access to a large sum of money quickly, allowing you to pay it back in fixed-rate monthly instalments until the loan is settled.

You’ll need to tell your lender how much you want to borrow and for how long (use a loan calculator if you want get a rough idea of how much a loan might cost). In our case, you’ll be able to apply to borrow from £1,000 to £35,000 and spread the cost over 2 to 7 years.

Lenders such as Novuna Personal Finance make a decision on your personal loan application by assessing your creditworthiness and paying capacity, rather than by asking you to provide collateral to borrow against (such as your house or car).

If accepted, you’ll be offered a personalised Annual Percentage Rate. This is essentially the cost of borrowing money and will be added to the total amount payable. You’ll then repay what you owe each month until your loan is settled.

All aspects of your loan are decided upon and agreed up front, at the point at which you sign the loan agreement. You’ll know your rate, how much you’ll need to pay back each month and the number of months over which you’ll make your repayment. This makes a personal loan a structured way to ensure you’re borrowing within your budget.

For more information, including key advantages and disadvantages of taking out a personal loan, read our in-depth guide on how personal loans work.

What are personal loans used for?

You can use a personal loan for all kinds of things, including:

• Significant purchases, such as buying a new car or bike
• Major projects like home improvements or a swanky new campervan conversion
• Special occasions such as a wedding or holiday of a lifetime
• Consolidating debt so you have just one monthly repayment to think about
• Unexpected expenses like an emergency car repair or vet bill

Of course, there are some things you can’t use a loan for. This includes taking out a loan for business purposes or investments, gambling or cryptocurrency, house deposits or property purchase, any illegal activity or day-to-day living expenses. Always check the terms on your credit agreement to ensure your loan purpose is allowed by your lender.

It’s important to know what you plan to use a personal loan for – and how much you expect this to cost – before applying. After all, you don’t want to end up paying interest on money you didn’t need to borrow in the first place.

How much can I borrow with a personal loan?

With Novuna Personal Finance, you can apply to borrow between £1,000 and £35,000. However, you’re not guaranteed to be accepted for a lender’s maximum amount.

How much you can borrow will depend on a variety of factors, including:

• How long you want to take out the loan for. Borrowing over a short period will result in a larger monthly repayment versus spreading the loan over a longer timeframe, for example, which could affect how affordable the loan is for you.
• Your creditworthiness. The likelihood of you keeping up with your repayments based on your credit history will impact a lender’s decision.
• Whether the loan amount will be affordable for you. Lenders will assess how likely it is that the additional repayments will put strain on your finances.

Bear in mind that personal loans are best suited for those significant one-off purchases or projects. If you’re looking to borrow a lower amount, a credit card could allow you to borrow the money you need to fund several smaller purchases. You may incur high interest charges if you don’t pay off your balance in full at the end of every month, though.

If you’re looking to borrow a much larger amount (for example, to buy a house), you might consider looking into a secured loan. As secured loans are pledged against an asset such as a house or car, the amount you can borrow is usually related to the value of collateral available and any debt currently secured against it - as well as how much you earn. This means you may be able to borrow more money with a secured loan (though, again, be aware that you may end up paying more interest in total when you borrow over a longer period).

How much will a personal loan cost?

Lots of different factors will impact how much a personal loan could cost each month, including:

• Loan amount

Of course, the more you borrow the more your loan will cost you each month (assuming the loan term is the same). For example, monthly repayments on a £1,000 loan spread over 5 years will be significantly lower compared to monthly repayments on a £35,000 loan spread over the same time period.

It’s worth noting that different loan amounts carry different interest rates, though. So while a smaller loan may well result in lower monthly repayments you could find that you’ll be offered a higher interest rate. Always read through your credit agreement carefully before taking out a loan.

• Loan term

The longer you borrow money for, the more interest you’ll pay in total. So, though your monthly repayments might be lower if you spread the cost over a longer period, the total amount of interest will be greater.

It’s up to you whether you’d prefer to pay less interest (and therefore keep your loan term as short as possible) or whether a lower monthly repayment is more important to you.

• Interest rates

The interest rate you’re offered will impact how much your personal loan costs each month. A higher Annual Percentage Rate (APR) will result in higher monthly repayments as you’ll be charged more for borrowing money, whereas a lower rate will result in lower monthly repayments.

The APR you’re offered is just for you, calculated based on your personal and financial circumstances, plus your credit history. If your lender thinks the loan amount you’ve applied for is affordable for you, and you have a good track record of making repayments in the past, you’re more likely to secure a lower APR which means you’ll pay less interest overall.

You may find it useful to use a loan calculator to give you a rough idea of how much a loan could cost each month and in total. Simply tweak the loan amount or term on the calculator to see the potential impact on your monthly repayments. The APR used on our loan calculator is a representative rate (the rate 51% of our customers are given). So while you’re not guaranteed to be offered this rate, the calculator could help you to estimate how much a loan could cost each month to ensure it’s affordable for you.

How long do personal loans take to process?

How long it takes to get a personal loan will vary. It could take anywhere from just a few days to several weeks to borrow the money you need, depending on the lender you choose and how quickly you provide the information required. Always gather the documents and information you need before applying to help speed up the process.

The loan application process can be quite simple - particularly if you apply online. Our application takes just a few minutes to complete and you’ll get an instant decision. If you get accepted straightaway and e-sign your credit agreement quickly, the funds could be with you in just a couple of working days. Usually it’s even quicker than that!

If your application is referred, we may need some more information to help us make a decision. If you grant us open banking permission straightaway, your referral may not delay your loan application process by too long at all. If you need to send supporting information by post, though, you may find this delays the process significantly.

How quickly you return your signed credit agreement also determines how quickly your loan application can progress. Obviously if it takes you days or weeks to sign your agreement, your loan application will be delayed. However, e-sign your agreement straightaway and your lender can get straight on with disbursing the funds.

It’s also a good idea to make sure you meet the lender’s eligibility criteria before applying too. If you don’t, there’s a strong chance your application will be declined which will delay the application process as you’ll need to start from scratch.

How does personal loan interest work?

The cost associated with borrowing money is typically represented as an Annual Percentage Rate (APR). This calculated by combining the amount of interest with any additional fees included with your loan, allowing you to compare the cost of personal loans from different lenders.

You’ll likely see a representative rate advertised across a lender’s website. Though this is the rate at least 51% of customers receive, you aren’t guaranteed to be offered that rate when you apply.

The rate you’re offered is entirely personal to you, and will largely depend on your credit score, combined with personal and financial circumstances, loan amount and term.

Our ultimate personal loan interest guide goes into much more detail, telling you all you need to know about personal loan rates.

Is a personal loan fixed or variable?

Most personal loans are fixed rate. The interest rate remains the same for the duration of your loan, so you’ll always repay the same amount each month. This could help you to manage your outgoings as your monthly repayments won’t change.

There are some disadvantages of fixed rate products though. For example, if market rates change and interest rates go down, you may find yourself paying more interest in total compared to a variable rate product (where interest rates fluctuate). However, for many, the consistency and stability of a fixed rate product often outweighs this risk.

Will my rate change if my circumstances change?

Your rate will be fixed for the full term of your agreement, so it won’t change even if your financial circumstances have.

If, for whatever reason, you do find yourself in financial difficulty, please reach out to our team who will do their best to help find a resolution that works for you. Take a look at the Money Worries section of our FAQs for more information.

I have an excellent credit score, why didn’t I get the headline rate?

The rate you’re offered is not solely based on your credit score.

Every lender has their own criteria and will be looking at lots of factors when deciding on the rate they can offer you. For example, they may also take into account other information received from your credit check, any history you have with the lender and your personal or financial circumstances.

Our article about what to do if you have a good credit score but your application has been declined could be helpful.

Are personal loans secured or unsecured?

Personal loans are unsecured which means you won’t need to put up collateral to borrow the money you need. Instead, a finance provider will decide whether to lend money to you based on your personal and financial circumstances, credit history, loan amount and term. Essentially, the lender will base their decision on how likely you are to repay what you owe.

With a secured loan you must pledge an asset against the amount you wish to borrow. The value of this asset will impact how much you’ll be able to borrow and may also affect the interest rate you’re offered.

There are some key differences between secured and unsecured loans including:

• How much you can borrow and over how long

Some secured loans may allow you to borrow a larger amount of money compared to an unsecured loan, as the money you borrow will be secured against an asset you own.

This also means you’ll probably be able to pay a secured loan back over a longer period, which could help to lower your monthly repayments. Do be aware, though, that you’ll likely end up paying more interest overall that way.

• The application process

The application process for an unsecured loan is often much more straightforward. As you won’t need to provide details of assets, they won’t need to be assessed or valued. This not only makes the application process quicker and simpler to complete, but you should also receive a lending decision much sooner too.

• Eligibility criteria

To successfully apply for an unsecured loan, you must meet the lender’s eligibility criteria which most likely means having a steady income and a good credit history.

You may therefore find it more difficult to be accepted for an unsecured loan if you have a less-than-perfect credit history as lenders may view you as more of a risk.

As your assets acts as security when you take out a secured loan, you may find that they’re easier to qualify for. Do keep in mind that your assets may be repossessed if you fail to make your repayments though, which could make a secured loan a riskier choice.

• What happens if you fail to make your repayments

Your valuable assets aren’t at risk of being seized by the lender if you take out an unsecured loan, though any missed or late payments will be recorded on your credit file which could make it more difficult or expensive to borrow in the future.

• Interest charges

Interest charges on unsecured loans do tend to be higher because they aren’t backed by collateral. However, as your repayment period is likely to be longer with a secured loan, you could end up paying more interest in total over time. It really is up to you whether you’d prefer to take out a loan over a smaller timeframe to reduce total interest, or whether it’s more important to you to keep those monthly repayments down.

Unsecured loans are also normally always fixed rate, which means the interest rate won’t change for the duration of your term. This helps you to budget and manage your outgoings effectively, as the amount you pay each month won’t change.

Can you consolidate debt with a personal loan?

Personal loans can be used to combine high-interest debts into one monthly repayment. You’d need to calculate how much debt you have (including any additional costs or fees such as early repayment charges), apply for a debt consolidation loan for that amount, use the money from the loan to pay off what you owe (if accepted) and then make your monthly repayments until the loan is settled.

A consolidation loan could help you to make it more straightforward to manage your debt. Not only will you have just one monthly repayment to think about, but it will also be fixed rate which means the interest rate (and therefore your monthly repayment amount) will remain the same throughout your loan term.

You may also be able to reduce the amount of interest you pay monthly if your loan’s APR is lower than that of your existing debt. However, you may find that you’ll pay more interest overall if you spread the cost of your debt over a longer period.

If you’re aiming to use a debt consolidation loan to save money, you should also take into account any fees or charges you may incur for settling your existing debt early or transferring the debt as this could make the debt consolidation loan less cost effective.

Other debt consolidation options include a balance transfer credit card, remortgaging or approaching a debt management charity such as StepChange and coming up with a plan for paying off your debt most effectively.

For more information about the pros and cons of debt consolidation, and how a debt consolidation loan could impact your credit score, visit our guide.

Difference between a personal loan and a credit card

If you’re considering taking out a personal loan, you should always consider the other borrowing options available too. One of the most common alternatives is a credit card.

A personal loan is a type of instalment credit that allows you to borrow a fixed amount of money and pay it back in equal instalments over a set period, whereas a credit card is most commonly a type of revolving credit that enables you to keep borrowing up to the maximum amount allowed (your credit limit). You can vary how much you pay off your balance, though you’ll need to pay a minimum amount each month.

You may find a personal loan is most suitable for larger purchases as you’ll be able to borrow a greater amount and pay it back over a longer period of time, whereas credit cards are usually more suitable for several smaller purchases as they typically have a lower borrowing limit.

The main benefits of a personal loan are:

• You may be able to borrow more money using a personal loan
• As the repayment term is often spread over several years, you may be able to spread the cost of a larger purchase over a longer period
• A personal loan is fixed rate, so your repayments will stay the same each month. This could help you to better manage your outgoings
• You may find a personal loan carries lower interest charges than a credit card (depending on the personal rate you’re offered)

The main benefits of a credit card are:

• It could be quick and easy to borrow the money you need if you already have a credit card
• You can be flexible regarding the money you borrow – borrow as much as you need when you need it, up to your maximum credit limit
• You may qualify for introductory offers, such as an interest free period, or rewards when you use your card
• If you pay off your entire credit card bill each month, you normally won’t pay any interest
• For any purchases made between £100 and £30,000, your credit card company will support you in getting your money back should the seller not deliver as promised

Our guide goes into more detail if you’re wondering whether you should choose a personal loan or a credit card.

How does applying for a loan impact your credit score?

Your credit report (also known as your credit file) provides a detailed overview of your financial history, helping lenders to build a picture of what kind of customer you’re likely to be. They’ll use the information found in your credit report to develop a unique ‘score’ for you, which ultimately helps them to decide whether to lend to you – and at what rate.

Applying for a personal loan will have an impact on your credit score, as the application process involves a hard credit check which will be recorded on your credit file. This is likely to only have a temporary impact on your credit score, though do be aware that multiple hard searches in quick succession may have a more significant impact as it suggests you’re applying for multiple types of credit all at once (a potential sign of financial instability).

You may also have the option to check your eligibility for a finance product, such as a personal loan, before applying if a lender offers soft search. A soft search has no impact on your credit file. It simply gives lenders a brief overview of your financial history. This allows you as the customer to be given an idea of how likely you are to be accepted for a finance product before a hard search is conducted.

Actually taking out a personal loan may have a much bigger impact on your credit file so it’s important you understand the implications before going ahead.

You may find that taking out a personal loan has a positive impact on your credit history, as it may help to improve your credit mix and prove you can handle debt responsibly. However, late or missed payments could have a much more detrimental impact. It’ll be recorded on your credit file and stay there for up to six years, which could affect your ability to borrow in the future as lenders may consider you more at risk of defaulting on future loans.

If you’re looking to build up your credit history, you could find that a personal loan can have a positive impact if managed correctly. Showcasing you can responsibly repay what you owe on time each month proves to future lenders you’re a safer bet, which may help you to obtain credit again in the future (and could help you to secure the best rates too).

It’s worth noting that you should never take out a loan just to build credit, though. You should only borrow money if you really need it, and you’re confident you will be able to manage the repayments.

Our guide on whether personal loans help to build credit goes into more detail.

Do personal loans affect your mortgage?

As mortgage providers will assess your credit file at some point during the mortgage application process, you will find that a personal loan could have some kind of impact on getting a mortgage.

Mortgage providers will look at how you’ve managed money in the past – including your history of repaying debt – and will also assess your current levels of debt compared to the money you have coming in to decide whether a mortgage product is affordable for you.

A personal loan, and how you manage that loan, will impact a mortgage provider’s credit risk and affordability checks.

In terms of affordability, mortgage lenders will want to be assured that you’ll be able to afford your mortgage repayments in addition to any other credit commitments. A personal loan will form part of your debt-to-income ratio, which may impact how much additional money you’ll be able to borrow.

You may wish to pay down some of your debt before applying for a mortgage if you feel your debt-to-income ratio is a bit too high. It could also be a good idea to avoid applying for new credit if you know you’re going to be applying for a mortgage soon. This will avoid a hard credit check being recorded on your file, which will have a short-term negative impact on your credit score. It will also ensure you don’t end up taking out credit that may be unaffordable for you later down the line.

How you’ve handled your loan repayments could impact your ability to get a mortgage too. If you’ve consistently repaid your loan on time, you may find this actually has a positive impact on your credit report. However, if you’ve made late payments or missed payments in the past, this will be recorded on your credit file and could make it less likely your mortgage application will be accepted.

You can, of course, check your credit report in advance of applying for a mortgage so you have a clear idea of the information your mortgage provider will be assessing. Make sure any information is up to date and free from errors that could affect your application.

To find out how to minimise the impact of a personal loan on your mortgage application, read our guide on whether personal loan affect getting a mortgage.

Our personal loan eligibility criteria

You’ll need to meet a lender’s eligibility criteria to successfully apply for a personal loan. While it might seem disappointing if you don’t meet the criteria, do know that lenders such as ourselves don’t set an arbitrary checklist of requirements for the sake of it.

We want to make sure that we only lend money to customers who can afford to make their repayments without putting strain on their day-to-day finances.

Typically speaking, the factors that affect personal loan eligibility are:

• Age. Finance providers have a duty to lend responsibly, so will only lend to adults over the age of 18. Many may choose to only lend to those aged 21 or over too.
• Income and employment. Lenders need to assess whether the loan repayments will be affordable for you, and most reputable finance providers will not lend to those without a regular income.
• Address history. Lenders need to be able to verify your identity, and may use your address history as part of these verification checks.
• UK residency. Loan providers usually stipulate you must be a UK resident to ensure you have enough credit history to help them make a lending decision.
• Bank account information. Lenders need to know which account they’ll be paying the loan into and how you’ll make your monthly repayments.
• Credit history. Loan providers will assess your credit report to get a picture of what kind of customer you might be. Those with a strong history of repaying debt are more likely to be accepted as they represent less of a risk, which is why some lenders (such as ourselves) will only lend to applicants with a good credit history.

You may find eligibility criteria changes depending on the lender or the type of finance product you’re applying for. That’s because lenders set eligibility criteria based on what kind of customer they feel is suitable for that specific product.

Here at Novuna Personal Finance, applicants must:

• Be aged 21 or over
• Be a permanent UK resident — we’ll need to know your address history from the last three years
• Be in permanent paid employment, self-employed, retired with a pension or a houseperson with a partner in permanent paid employment or self-employed
• Have an income greater than £10,000
• Have a bank or building society account
• Have a good credit history. Whilst some lenders may be happy to lend money to those with a bad credit score, it’s important to us that our customers only take on debt we believe they can manage

Most reputable lenders will state their eligibility criteria on their website or as part of the application process, so always check before starting an application.

Managing your personal loan

Once you’ve taken out a Novuna Personal Finance loan, it’s time to start thinking about how you’ll manage your loan going forward.

It’s stating the obvious, but you should always endeavour to repay your loan on time every month until your loan is settled. Of course, if you have any trouble repaying your loan please get in touch with our team as soon as possible so we can work together to find a suitable resolution.

You can manage almost all aspects of your loan via your online account or the Novuna app. Check your balance, update your personal information, change your Direct Debit details, view your transaction history and message our Customer Service team.

There’s also the option to pay off your personal loan early, either by making overpayments or settling your loan entirely. You can do so online, via our app or by calling our Customer Experience team on 0344 375 5500.

It’s free of charge to make extra payments (also known as a partial early settlement). If you make an overpayment that’s higher than your regular monthly repayment (once your usual repayment’s already been made) then the extra amount will be automatically deducted from your outstanding balance. If you make an overpayment that’s less than your usual monthly repayment amount, your next monthly repayment will automatically be reduced.

You may wish to settle your loan in full earlier than expected. You can settle your loan at any time by requesting a settlement figure. You will be charged 28 days’ interest if the duration of your loan agreement is less than 12 months. If it’s over 12 months, we may charge up to 58 days’ interest.

Once your settlement figure is requested, you’ll have 28 days to settle your loan, or you’ll need to request a new settlement figure.

The main benefits of paying off a personal loan early are reducing your debt-to-income ratio sooner, and potentially reducing the amount of interest you need to pay. However, you should always take a closer look at your finances before overpaying or settling your loan early. While paying off your debt early might seem like a good idea, make sure you aren’t parting with a large sum of money that could be spent elsewhere (such as on paying down high-interest debt or putting some money into your savings account).

Ready to apply for a personal loan?

So now you know almost everything there is to know about personal loans. If you still have any questions, check out our FAQs or reach out to our team.

Should you wish to apply for a loan with Novuna Personal Finance, you could borrow from £1,000 to £35,000 at low rates from just 6.9% APR Representative (£7,500-£25,000).

It’s quick and simple to apply for an online loan with us:

• Get a quote from our loan calculator
• Fill out our online application form (it should take no longer than ten minutes)
• Receive an instant decision
• Read and sign your paperless loan agreement
• If approved, the money can be with you in just two working days

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