Applying for a loan? What do you need to know first?

A couple picking out furniture

If you look after the pennies then the pounds will take care of themselves, so the old saying goes. But even the most stringent of savers may reach a moment when they could do with a little extra cash – whether it's to start a business, extend a home, buy a car, consolidate other debts or turn that photography hobby into something more professional. And taking out a loan could be a viable solution.

The good news is that, these days, loan providers aren’t exactly in short supply. They include:

  • High-street banks. These offer loans which may be secured – using an asset such as your car or your home as collateral in case you are unable to meet repayments – or unsecured, where no asset is required as security.
  • Supermarkets and department stores. M&S, Tesco, Sainsbury and Asda are just a few of the major retailers that now offer loans.
  • Peer-to-peer lenders. Online platforms such as Zopa and LendingWorks match borrowers to other people who are keen to lend. In theory, by cutting out the bank or lender, this could make borrowing cheaper.
  • Specialist lenders. As the name implies, these tend to lend to those in specific circumstances – student loans, for instance, or people who find it hard to get credit. This group also includes guarantor and payday lenders. Interest rates from these lenders can be much higher than for standard loans.

Nowadays, many loan applications are made online – but in certain cases, such as a couple applying for a joint loan, the paperwork may need to be physically signed for and posted back, rather than completed online.

What happens when you apply?

When you apply for a loan, the lender will consider a long list of factors to make sure you're a reliable borrower. This includes checking your credit history – including any mortgages, credit cards, overdrafts and other loans you might already have – and how well you’ve kept up with repayments.

Other considerations include your employment status, income, how long you've lived in your property, whether you own your home, the loan amount and purpose, and perhaps even your bank statements, which prove income and give them a picture of your regular outgoings.

This information all goes into giving you a credit score, which gives the lender an idea of whether you're capable of repaying this particular loan. This can be calculated in many different ways, so even if you've been declined by one lender, you may be successful elsewhere.

Your application is then either approved, approved pending further information, reviewed before making a decision, or declined. If approved, you may be able to finalise the loan online, or you could be asked to sign and return a paper agreement. The funds will then normally be issued to your account – the lender will let you know how long this will take.

What do you need to keep in mind before applying?

  • Is a loan the right thing to apply for? This may well depend on what you are buying and how much it will cost, so look at the different credit options available and work out what is best for your situation. For example a 0% purchase card could be better, as long as you can pay the balance within the introductory period.
  • Can you afford the repayments? Do your sums, examine your income and expenditure, use online calculators to get quotes based on the loan amount, and only commit if you’re sure you can pay the money back.
  • The APR. The annual percentage rate (APR) is the interest rate you'll have to pay for borrowing the money, including any fees or additional costs. It can be influenced by how much you’d like to borrow, as well as your individual circumstances, and can be incredibly important because it could make a large difference to your monthly repayments.
  • Applications leave a 'footprint'. Every time you apply for a loan (or any form of credit), the lender checks your credit history – this is known as a ‘hard check’ and leaves a footprint on your credit report. When other lenders check your report, they can see that you've applied elsewhere – multiple applications in a short period of time can count against you, as it might look as if you’re desperate for credit.
  • Is there a better deal out there? Shopping around for a loan is essential. Before applying for a loan, explore rival lenders and price comparison sites to see what competitors are offering. Make sure you find the deal with rates and payment terms that suit you – and always check the fine print.

It could also be worth using a website that allows you to check your chances of being approved for a loan, so you know which ones you're more likely to be accepted for. Not only can this take the guesswork out of applying, searching in this way counts as a 'soft check', and doesn’t leave a mark on your credit report which is visible to lenders.

Before you apply for a loan, Experian can show you the personal loans you're more likely to be accepted for. This only counts as a 'soft check' and isn’t seen by lenders – so it doesn’t affect your credit report or score at all.

As a credit broker rather than a lender, Experian uses your credit report, as well as information you provide about your requirements and financial circumstances, to show you personal loans and credit cards that are matched to you. This means you can see a personalised list of products that you are more likely to be accepted for, without affecting your credit score.

Join Experian to start your search now.

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With the free Experian account you’ll get:

  • Your Experian Credit Score, updated every 30 days if you log in
  • Compare credit cards, mortgages, loans, insurance and energy offers
  • See your eligibility rating before you apply for credit cards and personal loans
  • Get updates about your eligibility for credit cards and personal loans