Choosing a Personal Loan

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.