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What to check before applying for a loan

If you want to make improvements to your home or buy a new car, a personal loan can give you a helping hand.

But before you apply for a loan, there are some things you need to consider.

1. Is a personal loan the right option?

A personal loan isn’t the only choice available. Are you able to delay the spending and take time to save the money? Even if you’re not able to save the whole amount, saving a portion of it will put you in a better position.

If the amount you need is relatively small and you’re confident you can pay it back quickly, a credit card with an interest-free period on purchases is another option.

Explore: Credit cards vs loans: funding options explained

2. What will the loan repayments be?

Use our personal loan calculator to look at how much your repayments could be and how that may impact your budget. 

If you’re looking at a personal loan with a variable interest rate, keep in mind that the rate of interest could go up or down. If it was to go up, could you still afford the repayments? If not, you may want to consider reducing the loan amount or extending the loan term.

3. Is the loan secured or unsecured?

A secured loan is one where you use an asset (such as a car, or property) as security for a reduced interest rate. This asset will be at risk if you can’t pay the loan back. With an unsecured loan, you don’t provide security, but the amount you can borrow is typically smaller. HSBC offers both secured loans – in the form of mortgages – and unsecured loans.

Explore: Secured vs unsecured loans explained

4. What's the term of the loan?

This impacts the amount of interest you’ll pay and the overall cost of the loan. The longer the loan term is, the less your regular repayments will be. But you'll likely end up paying more interest over the course of the loan. Again, you can use our loan repayment calculator to look at how changing the loan term may affect the overall amount of interest you pay.

5. What exactly are the fees and charges?

Loans are advertised with a representative APR (Annual Percentage Rate). This allows you to quickly compare the available offers from different banks. However, the final interest rate you're offered will be determined by:

  • your financial history

  • your personal circumstances

  • how much money you want to borrow

  • how long you want to borrow the money for

Look for any additional charges associated with taking out the loan. For example, some lenders may charge an arrangement fee. These, together with the interest rate, can make a big difference to the overall cost of the loan.

Explore: How do personal loans work?

6. Is there a penalty for early repayment?

Some lenders will charge you a fee for paying off your personal loan early. If you feel this is something you may want to do, then finding a loan without this fee could be a key requirement.

7. How's your credit report looking?

Your borrowing and financial history can determine your credit score and whether you're approved for a personal loan. It can also affect the amount of money and interest rate you’re offered. 

Credit reports detailing your financial history are held by the three credit reference agencies:

  • TransUnion

  • Equifax

  • Experian

It can be a good idea to check your credit report, if only to make sure there are no mistakes on your file. However, your credit report won’t tell you whether or not you’ll be approved, as it isn’t the only factor a bank will consider when making a decision.

8. Are you ready to apply for a loan?

Getting a quote for a loan won’t usually appear on your credit report, but making an application often will. Too many applications can have a negative impact on your credit report, so it’s wise to be sure that a particular loan is right for you before you apply.