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Personal loans

A personal loan is one of the simplest ways to borrow money. Because of that, it’s also one of the most popular: there are hundreds of options out there, each one slightly different.

This guide will tell you everything you need to know about personal loans: what to consider before you take one out, what to look for and how to make sure that you choose the right option for you.

This guide is designed to give you an easy-to-read overview, with short summaries that link out to more detailed articles if you need them. And if you’re ready to look at some options, take a look at our loan calculator to see how repayments might look for you in practice.

What is a personal loan?

A personal loan is very straightforward:

  1. You borrow a fixed amount of money, at a fixed rate of interest.
  2. You receive the money as a lump sum, and make pre-agreed monthly payments until you’ve paid the loan off in full, with some interest added.

The interest rate you pay (often shown as an annual percentage rate, or APR) can vary significantly depending on:

  • Your credit history – borrowers with a positive credit history will have more, cheaper options available to them
  • The loan term (length of your loan) – in general, very short term loans will have a higher interest rate, and you might pay a lower rate if borrowing for a longer period
  • The total amount you want to borrow

The first option is out of your immediate control – building up a positive credit score takes years, although there are some short-term steps you can take.

The second two are within your control, and you can use a loan calculator to see how different terms and amounts can change the interest rate you’ll pay.

A simple illustration of how a personal loan works.

Related post: Considering a loan to cover a medical procedure? Our detailed guide on medical loans covers everything you need to know about loans for medical treatment, with alternative options and insider info on how to find the best option for you.

How does a personal loan affect your credit score?

Taking out any form of credit (including credit cards, personal loans and the overdraft on your bank account) will affect your credit score – but perhaps not in the way that you think. 

Related post: Personal Loans Vs. Credit Cards – Which Is Best For You?

an image showing how actions associated with taking out a personal loan affect your credit score

In general, taking out a loan will cause your credit score to dip slightly in the short term. However, the surest way to improve your score is to pay off credit – that shows potential lenders that you’re good at managing loans.

As a result, as you pay off your loan, you’re likely to see a strong, steady increase in your score.

What is an unsecured personal loan?

Personal loans can be unsecured or secured. In general, an unsecured loan is used to borrow up to £20,000-£25,000. Secured loans can be used to borrow much larger amounts, but the lender takes an asset (usually your home) as security, meaning that your home is at risk if you fail to make repayments in full. 

A visual representation of how secured loans work

Koyo loans are unsecured and can be used for loan amounts between £1,500 and £12,000 with a representative APR of 27%.

What credit score do I need for a personal loan?

If you’re considering a personal loan, your eligibility will depend on your personal circumstances.

When you apply for a personal loan, many providers will base their decision on information from a credit bureau, such as Equifax or Experian.

Wondering what credit score you’ll need for a personal loan? Here’s a useful rule of thumb: a good credit rating will mean:

  • You have more borrowing options available to you
  • You can borrow larger amounts
  • You can borrow at a lower rate

While there isn’t really a “minimum credit score” required for personal loans, in practice people with a “poor” or “very poor” score will find it very difficult to find a standard loan. 

A bad credit score can be frustrating, as your credit history might not tell the whole story. For example, they might simply never have taken out a loan before, meaning that conventional lenders don’t have much information to base their decisions on.

Here, it’s worth noting that a lender doesn’t have to base lending decisions on credit scores alone: for example, Koyo uses Open Banking data to make informed decisions based on your income and outgoings, rather than basing our decision on what someone else says about you.

In our post on how to get approved for a loan, we cover the key things you need to know to make sure you’re applying in the right way.

Related article: what documents you’ll need when applying for a personal loan.

Reasons to get a personal loan

There are lots of good reasons to take out a personal loan. Some of the most common include:

  • Debt consolidation
  • To make home improvements 
  • To fund a major purchase, such as a car

Whatever the reason for your personal loan, the most important rule is to only borrow what you can afford to repay. In addition, if you can avoid taking out a loan by saving up for the purchase, that option will save you money.

Access to credit can be tough for people who’ve recently moved to the UK. We wrote a guide on how to build a credit score for new immigrants to the UK. It’s designed to give you all the information you need to improve your odds.

If you’re new to the UK, accessing a loan can be difficult. Our guide on how foreign nationals can get a loan in the UK explains how long you need to have been in the UK to be approved for a personal loan, and how you can maximise your chances of accessing credit.

Related post:Thinking about taking out a personal loan to pay for a holiday? Our guide summarises 4 different ways of how to pay for a holiday including cash, credit cards, and personal loans, helping you to make the best decision.

Reasons for a personal loan rejection

If you’re rejected for a personal loan, it’s easy to take that rejection to heart: you might interpret it as the lender thinking that you won’t pay the loan back. You shouldn’t take it personally though – lenders generally base their decision on a credit report from a credit bureau, such as Experian. 

When carrying out a credit check, each lender will assign different weight to different factors (e.g. one might not want to lend money to someone who’s moved around a lot, while another might want to avoid someone who has taken out a payday loan before). But just because one lender has rejected you, doesn’t mean that you won’t be able to find credit elsewhere.

Lenders have different criteria, so it’s worth shopping around. For example, for personal loans in the UK, Koyo uses Open Banking data instead of credit bureaus, to make accurate lending decisions based on affordability rather than what someone else says about you.

Related post: Have You Been Refused A Loan? Here’s What To Do Next

Hopefully, this post has given you all the information you need on personal loans – if so, take a look at our loan calculator to see what your options might be. And if there’s anything else you want to know, let us know in the comments section below!