How Do Personal Loans Work?

How Do Personal Loans Work?
Cash Lady

How Personal Loans Work?

How Do Personal Loans Work?

Credit checks, underwriting, APRs – the world of personal loans can seem overwhelming for anyone less than a financial professional. Let’s demystify this landscape and explain, in jargon-free English, how personal loans work.

Personal Loans – A Brief Overview

Personal loans are a form of credit that provides a lump sum of money that is then repaid over a fixed period of time. Personal loans are unsecured (unlike a mortgage, which is secured against your house, or a logbook loan, which would be secured against your vehicle).

Personal loans are typically cheaper than an overdraft, credit card or payday loan, however, interest rates do vary greatly from provider to provider.

What Is a Revolving Loan?

Revolving loans (also known as evergreen loans, revolving lines of credit and revolving credit facilities) don’t have a fixed repayment term. Instead, they function as an overdraft does – offering credit that is repaid, and that can be used over again.

The advantage of a revolving loan is the flexibility of this form of credit. On the flip side, this permanent form of finance requires you to be good at budgeting and a responsible borrower. You would also need to be aware of the interest rate at any given point in time, as the APR interest rate you’ll pay is variable.

How Personal Loans Work: The Personal Loan Application Process Step by Step

Step 1 To apply for a personal loan through CashLady you must meet certain criteria:

How Personal Loans Work?

  • 18+
  • UK Resident
  • Earn a minimum of £500 pcm

Step 2 You must have the following on hand:

  • Your details – including your address, contact details, regular personal outgoings and employer’s details
  • Access to the internet
  • Your bank details

Step 3 Your details are then sent to a network of lenders

Typically you’ll receive an answer within a couple of minutes (although sometimes we do need to take a little longer to process your application).

Step 4 Choose your preferred lender and personal loan offer

Step 5 Complete your loan application

The entire process takes around 5 minutes from beginning to end.

When a repayment is made, the money goes partially to repay the lump sum, and partially to repay the interest on top of the lump sum.

What Is Underwriting?

Loan underwriting is the process that is undertaken to analyse the information provided by a loan applicant. This process involves assessing your credit file and effectively checking whether an applicant meets a particular set of minimum loan criteria. The role of underwriting is to ensure that repayments are within the borrower’s affordability, based on their income and outgoings, and their past record of managing credit.

Broker Pro Tip: CashLady is an FCA authorised credit broker, which means that we act independently and connect lenders with borrowers. As part of the personal loan process, we send our applicants’ details to our trusted network of lenders, matching applicant profiles with suitable lenders. By contrast, approaching single lenders results in a restricted lending criteria that you either meet, or you don’t.

What Happens If I Miss a Personal Loan Repayment?

How Personal Loans Work?

Each lender has their own set of charges which are presented prior to you agreeing to the personal loan. These fees will include any penalties for payments that are either missed or late.

Beyond the financial repercussions, borrowers should be aware that not keeping up with their personal loan repayments, on time, will affect their credit record and can impact their ability to access credit in the future.

How Do Personal Loan APR Interest Rates Work?

When you agree to a personal loan, you agree to repay both the lump sum that you receive, as well as the interest that is charged on top. Known as APR (Annual Percentage Rate) this percentage indicates the total charges you’ll pay (e.g. the interest and any compulsory fees).

Broker pro tip: Always know what form of interest is charged on your loan as some loans feature compound interest – which is interest charged on interest.

Image: Illustration of APR on CashLady personal loan

Image: Illustration of APR on CashLady personal loan

Get a customised idea as to how much your personal loan may cost with our loan affordability calculator.                          

*The calculator is for illustration purposes only and may not reflect the exact actual cost which depends on the lender.

Decided to move ahead with a personal loan and satisfied you understand how personal loans work?  If you’re still uncertain about whether this type of finance is right for you,  read our FAQs, contact the CashLady team or use the live chat feature.