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Personal loans

Personal loans, or unsecured loans, are often the cheapest way to borrow money for expensive purchases and home improvements.

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What are personal loans?

Personal loans are a way of borrowing a lump sum of money for a personal use. You repay personal loans through fixed monthly repayments with interest over a set period of time, usually between one and seven years.

Often these are known as unsecured personal loans. This is because these loans aren't secured by an asset or property, so if you’re unable to repay the loan, the lender can't repossess the property to recoup the loan.

Is a personal loan right for me?

Personal loans pay out in fixed lump sums, which you can use according to your needs. For example, you may want to book a family holiday, fund your dream wedding or consolidate your debt. You may also have been longing to do some home improvements such as a new bathroom or kitchen - a personal loan could help you do this. A real benefit of a personal loan is that if approved, you can use the money for anything you want - you don't have to have any purchases or payment approved by the lender.

A personal loan can help spread the cost over a longer period of time than a credit card, making it more manageable to pay back.

Paying back an unsecured loan is also often cheaper than borrowing the same amount of money using your bank overdraft facility, or on a credit card.

How much can you borrow using a personal loan?

Typically, unsecured personal loans are for borrowing anywhere from £1,000 to £50,000.

When you apply for a loan, how much you are able to borrow will depend on your credit rating, which lenders will use to help them work out how likely you are to pay the loan back. A good credit rating means you can borrow more, and will be offered the best personal loan rates. You can use our personal loan calculator to check the current rates.

What is a credit check?

When you apply for a loan, lenders will run a credit check. This is when lenders request your credit file form Credit Rating Agencies (CRAs) to assess your eligibility for a loan. Your credit file includes information on how you’ve managed debt in the past. It records if you have missed any payments, how many times you’ve applied for credit and other details.

How much will a personal loan cost me?

The cost to you of an unsecured personal loan is known as the APR, or annual percentage rate. This is the number you should look out for when using a loan calculator and loan comparisons to find the best personal loans that suit your needs. You can read more about how APR works here.

Included in the APR is the interest rate you will pay for taking out the personal loan, and any additional fees the lender will charge. These costs will be included in your monthly repayments when you start paying back the loan.

A higher APR means the personal loan is more expensive for you. When comparing loans, use the APR number as a guide to get the cheapest loans by choosing a low APR.

Some personal loans have variable interest rates, meaning they can cost you more or less month to month. If you're worried about being able to afford higher repayments, or want the certainty of a fixed repayment plan, you should avoid this type of loan.

Unsecured personal loan lenders will also consider other factors such as, your income, and how much other debt you have, to assess whether you are eligible for a loan.

What is a 'representative' APR?

When searching for unsecured personal loans on loan comparison websites you will often see the interest rate and fees number referred to as the ‘representative’ APR.

This is the APR (or lower) that at least 51% of a lender’s customers will pay when taking out a personal loan being advertised.

Because a lender needs to take your personal circumstances into account before it can tell you exactly how much it will charge you for a loan, you might not actually get the interest rate on offer on loan comparison sites. This may be a confusing way of advertising products, but given so many successful applicants will be given different interest rates, this is about the fairest way to lenders to allow customers to compare multiple products at once before making a decision.

This is why it can be useful to use a ‘soft credit check’ to check your eligibility for a loan. This way you can find out the kinds of loans you’re likely to be approved for without getting a mark on your credit file.

How do I find the best personal loans?

The easiest way to find the best personal loan rates is to run a personal loan comparison and compare loans from as many lenders as you can. Remember that the cheapest personal loans may not always cover your needs.

Here are some things you need to consider when comparing loans:

  • Amount you want to borrow: If you can’t borrow the amount you need to cover your needs, it doesn’t matter how cheap a deal you get.

  • How long you need to repay: How long a loan term you choose will affect what your monthly payments will be. It’s important to pick a term long enough to keep the monthly payments affordable. A longer term means lower monthly payments, but it also means you’ll pay more in interest overall.

  • Interest rate: This is the cost of borrowing money. The interest rate you are offered will depend on your financial circumstances such as, your income, debt, and credit score.

  • Fees: Some lenders often charge extra fees such as, arrangement fees or early repayment fees. By running a personal loan comparison you can find lenders who may not charge these fees.

What are the risks with a personal loan?

Lenders that offer unsecured personal loans make their money by charging customers a fixed APR over a set period. If you pay back the loan early, they lose out.

If you decided to repay your personal loan in full before the end of the agreed term, loan providers may charge you early repayment penalties. Some lenders won't charge this, so read the fine print. Even with the early repayment charges, you may be better off paying back the loan more quickly.

It is very important to pay every monthly repayment of an unsecured personal loan. If you don't, you may be charged a fee and interest on any missed payments, and it could negatively affect your credit rating for months or even years to come.

In the worst cases, non-repayment of an unsecured personal loan can mean you are issued with a county court judgement (CCJ), or have to declare yourself bankrupt which leads to a lifetime of financial problems.

What is a cooling-off period?

When you take out a personal loan, you have a 14-day cooling-off period to decide if you really want it. This is from the date the loan agreement is signed or when you receive a copy of the agreement, whichever is later.

If you cancel, you have up to 30 days to repay the money you have borrowed, and you can only be charged interest for the time you had the loan in your account, with any extra fees refunded. This does not mean you do not have to repay any of the money that you may have already spent.

Can I get a personal loan with bad credit?

Although having bad credit limits your options, you may still be able to get a personal loan. You might want to consider:

  • Guarantor loans: These are loans in which you get a friend or family member to be a guarantor for your loan. This means that if you’re unable to repay your loan, it will be the guarantor’s responsibility to do so. Keep in mind being a guarantor is a serious financial undertaking, so you should not be asking a loved one to take on this responsibility unless you are confident you can repay the loan with no impact on them.

  • Bad credit loans: These are loans that let you borrow even if you have poor credit. These loans, however, tend to have higher interest rates than standard unsecured loans.

  • You may also consider secured loans, which ties your loan to an asset such as a car or home. In the event that you’re unable to repay your loan, the bank or lender can repossess the asset to recoup the loan. It's never a good idea to borrow money if you don't think you will be able to repay it. Even though you may be able to pay for a lavish holiday abroad with a personal loan, it is not advisable to take out a loan you can't afford to repay just because you want a holiday. It would be more sensible to save up the money and only travel when you can pay for the trip from your savings without needing to take on what may be years of financial responsibility.