A personal loan, also known as an unsecured loan, allows you to borrow a certain amount of money in exchange for paying a certain amount of interest, which will be charged as long as it takes you to pay off the loan. Once you’ve taken out such a loan, you will need to make a set repayment every month for a period of time that is previously agreed upon with your lender.
As with any type of loan or credit card debt, you will have to repay not just the money you borrow, but also a rate of interest on top of that. The representative APR (i.e. annual percentage rate) is the rate that at least 51% of borrowers will be charged; the actual rate your lender offers you could be quite a bit higher, depending on your credit score. This means that the monthly repayment and total amount repayable listed alongside any personal loan example should only be used as an indication of the minimum you will be asked to pay back.
You can use a personal loan for any number of things – to help pay for a car or other large purchase, to consolidate debts, or for some necessary home renovations. The main advantage of an unsecured loan over a secured loan is that you won’t need to put up your house or car as collateral.
Unsecured loans also tend to come with lower interest rates than credit cards and allow you to borrow more than on cards. Most loans will furthermore offer a fixed APR and will set the repayments in advance, which means that you can be sure of how much you need to pay back each month, and plan accordingly.
There are, of course, some disadvantages to this. If your circumstances change, you won’t be able to change the amount you’re repaying to suit your new budget, which could stretch your finances and make it much harder to get out of debt. And while interest rates may be lower than those on credit cards, they can be higher than those on other types of unsecure loans – since you’re not putting up any form of collateral, lenders bear a bigger risk of non-repayment if you can’t keep up payments.
In the same vein, many unsecured loans will charge a penalty not just for missing a payment (or something going wrong with your monthly payment), but also if you want to pay off the loan early. This early repayment charge is a maximum of two months interest so it is something to consider but not a deterrent to early repayment.
Aside from these charges, some loans may require a set application fee. Also look out for other restrictions, as they may make a loan more expensive than it needs to be. Loans are regulated by the Financial Conduct Authority (FCA), so while some loans will naturally be more expensive than others, you can be sure that the lenders are properly vetted and you will be offered some assistance if you run into serious trouble.
Whether or not a loan is a good idea for you will depend on your personal circumstances and why you are looking to borrow several thousand pounds. If you’re not sure you can afford to make the same repayment every month and you only need a (few) thousand pounds, you could consider a credit card instead.
For sudden costs that you’ll be able to pay off after a month or two, a credit card or even an arranged overdraft on your bank account may be more suitable than a personal loan, as it generally doesn’t matter when you pay these debts off, as long as you make a minimum monthly repayment. At the other end of the spectrum, large amounts of money may require a secured loan.
An unsecured loan really shines in the middle ground. It’s for an amount that is not too little but also not too large. You’ll be tied to it for several years, but you’ll also be sure that you clear your debt by the end of the term, provided you keep up with your repayments.
Loans have the added advantage of not tempting you to spend more, with a credit card typically allowing you to keep using it until you hit your credit limit. A loan will therefore make it hard for you to get into any additional debt, as long as you put all your debt on it and cut up and cancel all your cards.
While it is still possible to get an unsecured loan if you have a poor credit score it can impact the amount a bank or loan company is willing to lend you as well as the APR. This means that before you decide on a personal loan, for whatever purpose, it’s always a good idea to check your credit score.
Another factor that will impact your ability to get a loan is your income and you may need to prove that you have the money each month to meet the minimum repayments of the loan. The number of debts/amount of debt you already have will likely be taken into account by a loan provider when reviewing your application. You should also be prepared to answer questions about why you want to take the loan, especially if it is a large amount you want to borrow.
You can get a personal loan from a bank or credit union. To ensure you get the best deal with a personal loan it is important to shop around and compare different APRs, finding the cheapest one for your circumstances, loan period and the amount you want to borrow.
Remember that your credit score can impact the interest rate on the loan so it is a good idea to check your credit score before searching to give you an idea of how much it will impact the loan you consider applying for and whether or not you can afford the loan.
If you’ve decided you need a loan, your next step is to see which loan would be best for you. Since any loan application will require a credit check, and multiple credit checks will lower your credit score – which in turn will make it less likely you’ll be offered the representative APR – you’ll want to compare personal loans carefully before applying for one, to make sure you stand the best possible chance of being accepted and reduce the risk of lowering your score.
Our personal loan calculator above is the easiest way to compare the different loans available and takes into account the amount you want to borrow along with the loan period. When deciding how long you want the loan period to be it is important to remember that the longer it takes you to pay back the loan the more interest you will have to pay but your monthly repayments will be lower. You will have to decide for yourself what you’re comfortable setting aside each month to repay your loan, but it would be wise to budget in a buffer, in case of unexpected changes to your situation.
If you’d prefer an expert loan comparison, you could have a look at the best rate tables, which feature the best loans for your selected criteria. These tables will naturally be unable to take your personal circumstances into account, so may not be your best option if you have bad credit.
Once you’ve compared different personal loans and decided on the best one, you will then have to apply for the loan. Depending on the provider and loan you have chosen, this can be done in person, online or via telephone. During the application process you will be asked questions, such as why you want the loan, your monthly income and any debts you may already have. All loan applicants will also go through a credit score check. Many loan providers aim to accept or decline an application as quickly as possible but be aware that is can take several weeks for a loan application to be processed.
Use our credit check provider comparison to find out your credit score before applying for a loan.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.