Credit Building > How applying for a personal loan works

How applying for a personal loan works

Wollit Team4 minute read · Updated 30th June 2024

Applying for a personal loan in the UK can be a pretty straightforward process, but it’s not without its challenges. Here’s how it works.

What is a personal loan and what do I use it for?

Personal loans are meant to help you cover a whole range of expenses, from large purchases like trips to home improvements and even consolidating debt.

They are usually unsecured, meaning they are not backed by an asset like a home. Personal loans are also offered by a wide range of financial institutions, not only banks: credit unions, online lenders, even peer-to-peer platforms.

What documents do I need to apply for a personal loan?

Here are the documents you usually need for a personal loan:

Proof of identity: Passport or EU ID card; driving licence; recent bank statement; latest tax return; or a letter from a benefits agency.
Proof of address: a recent utility bill; a mortgage statement; your current council tax statement; or a tenancy contract.
Prof of income: if you’re employed, you’ll need either a contract of employment or recent pay slips. You might also need to show a P60, which shows how much tax you’ve paid. If you’re self-employed, you’ll need to show your latest Self-assessment tax return or the SA302 form which shows how much tax you’ve paid. A bank statement from your business account is also useful.
Proof of the right to live and work in the UK: this can be either a British passport or Settled status card. The EU pre-settled status proof from the GOV UK website can also work, but you might need to prove that you intend to apply for Settled Status in the near future.

In short, you’ll need to provide whatever the bank or lender needs in order to verify your identity, address, income, and right to live and work in the UK.

The lender needs these because they have to assess your creditworthiness and ability to repay the loan.

Aside from these documents, the lenders will also need to run a credit history check to see how you’ve repaid debt in the past, and how risky you are.

You don’t need to do anything here except give your consent, as lenders can’t run a credit check without it. However, don’t worry about printing your credit report in a PDF format or downloading it and giving it to the lenders. They can’t do anything with it.

What the application process for a personal loan looks like

Applying for a personal loan is now most of the time done online, although some lenders may still require in-person visits.

Here are the general steps:

Choose a lender. Compare rates, terms, and eligibility criteria to find the best option for you.
Check eligibility: Before applying, always use an eligibility checker. This can help you understand what sort of credit you are likely to be approved for while keeping your credit score safe from the temporary negative impact of a full credit check.
Gather all the documents: proof of identity, address, income, and right to live and work in the UK. Again, you’ll usually need your passport, driving license, recent payslips, bank statements, and self-assessment tax returns.
Fill out the online application form and give the lender the details they need, including the amount you want to borrow, the repayment period, and your reason for borrowing.
Once you have completed the application, submit it to the lender. They will then review your application and may ask for additional documents.
The lender will run a full credit check. This is also called a hard check and it will temporarily lower your credit score. It will stay on your credit file for up to two years and will be visible to other lenders, so avoid making too many applications at once.
If your application is approved, you will receive a loan agreement with the terms of the loan, including the interest rate and the repayment schedule.
Finally, the lender will then transfer the loan amount to your account. Success.

Keep in mind that while the application process usually takes just a few minutes to complete, the time it takes for the lender to review and approve your application can vary from hours to several days. Having all your documents ready can help speed things up.

You should also remember that if you’ve added a “Notice of Correction” to your credit report, the lender is legally obligated to read it and check it.

This can sometimes delay loan applications. However, of course, it can increase your chances of approval if the lender understands the context of why certain adverse events happened in your credit history – for example, if you missed a few payments because of job loss or health issues.

What influences my loan approval chances?

There are many factors that influence a lender's decision to approve your personal loan application. Here are the main ones:

How much you earn: the lender will use this information to calculate the loan affordability ratio. The more you earn, the easier it will be to get approved.
Whether your income is stable: it’s usually much easier to get a loan as an employee than a self-employed person. If you’re self-employed, you’ll need to have been trading for at least two years. If you’re employed, usually you’ll need to have been in the same job for only 3 to 6 months.
How much debt to income you have: this is called the Debt-to-Income Ratio, and it shows how much of your income goes towards repaying existing debts. A lower ratio can indicate a lower risk.
Finally, your credit score: this will show lenders how you’ve repaid debt in the past. A good credit history and a high credit score can improve your chances of approval and also give you better loan terms, like a lower APR and higher loan amount.

How can I improve my personal loan approval chances?

To improve your chances of getting approved for a personal loan you should work on improving all the factors we mentioned above:

Try to get a raise.
If not possible to get a raise, try to get a new job that pays more (although you’ll need to wait a few months before you can apply for a loan).
Get a full-time job if you’re self-employed.
If you prefer self-employment, consider running your business through an LTD instead of being a sole trader, and pay yourself a salary instead of dividends. This will mean you’ll pay more in tax, though, and you’ll also need to spend more money on an accountant who does corporate tax returns, so check to see if it’s worth it.
Pay off your existing debts before getting a new loan.
Look into a 0% interest balance transfer credit card to pay off existing credit card debt faster.

However the most important thing you can do to improve your loan approval chances is to work on your credit history and improve your credit score.

Luckily, now there are many apps that can help you build and improve credit.

One such app is Wollit. Wollit is an app available both on Android and iOS, and it works by reporting a fixed-fee monthly subscription as a loan repayment to all three credit reference agencies.

This builds your credit history and helps you improve your credit score. Eventually, a better credit history will increase your approval chances – not only for personal loans, but also for other financial products, like insurance, current accounts with generous overdraft, credit cards with great rewards, and mortgages.