Personal loans are sums of
money which can be borrowed from banks, building societies and loan companies. The loan is usually
for a fixed repayment period and interest rate, with monthly repayments made by direct debit.
Personal loans can normally be used for any
purpose including buying a car, a holiday, a
wedding, home improvements, or to pay off existing
debts in one go such as credit card bills.
The key to choosing the right loan is to only
borrow what you can afford. Begin by setting out a
simple monthly outgoing and incoming budget.
Deduct your total monthly bills and outgoings from
your income to find out how much disposable income
you have. If you have, for example, £180 credit
remaining at the end of the month, don't commit
all of it to loan repayments, you should leave
some budget for contingency.
Secured and Unsecured Loans
The two main types of loan are unsecured and
secured. An unsecured loan is not secured on your home. If you fail to repay the loan, the lender cannot repossess your home.
The compare facility at the top of this page will
compare over 400 different unsecured personal loan
products available in the UK.
A secured loan is another
option available to homeowners only and is similar
to a mortgage. The loan is linked to your house
which is used as security for the amount you
borrow and as a consequence, if you fail to repay or 'default' on the loan
the lender has a claim on that asset.
Borrowing Limits
With an unsecured personal loan you can normally
borrow up to £15,000 - but some lenders offer up to £25,000.
Loan Repayment Terms
With an unsecured personal loan, you can normally
borrow the money over a period from 12 months to 7
years, although some firms will lend for a short
period of 6 months and others will allow you to
repay over 10 years. Most lenders will insist that you take out a direct debit for the repayments.
Interest Rates
Interest rates are generally fixed for the duration of the loan, which means you know exactly how much you will repay each month.
That means if you are offered a loan at 6.9% APR,
you will be charged that rate of interest for the
entire repayment period, regardless of any rise or
fall in the Bank of England base rate.
The important number to look for is the APR, the annual percentage rate. The
higher the APR the more you will have to pay in
interest charges.
Other Costs - Early Redemption Penalties
If you want to repay your loan in full before the
end of the repayment period, lenders will normally
charge you what is known as an early repayment
penalty. For example if you borrow £5,000 over 5
years and at the end of the 2nd year you want to
pay back all the money outstanding, lenders would
normally charge a penalty of no more than two months' interest.
The penalty charge is to compensate the lender for
the reduced amount of money they would have made
in interest as a consequence of you repaying the
loan early. Use the comparison facility above to
see who charges what.
Other Costs - Payment Protection Insurance (PPI)
PPI is optional insurance that covers your monthly
loan repayments if you cannot work because of accident, sickness or unemployment.
This protection is often expensive and you should
think carefully whether you really need this cover or not.
Credit Checks
Lenders will check your credit history to make sure that you are a good risk and do not have a history of bad debts and
defaults on loan repayments. To do this they will check your
credit history with a credit reference agency such
as Experian or Equifax. A poor credit history won't necessarily prevent you from getting a loan, but you will probably
won't have access to the lowest interest deals and
will have to pay a higher rate of interest.
If you are self-employed or are on a short-term
contract you may find it more difficult to be
accepted for the most competitive unsecured loans.