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While a credit card is a common way to borrow a small amount of money for a short time, and a mortgage a common way to borrow a large amount, unsecured personal loans can be the best way to borrow a fixed amount of between £1,000 and £35,000.
For borrowing a certain fixed amount personal loans often work out the cheapest option when compared to borrowing on a credit card or working into your overdraft. However, to get the most out of your unsecured personal loan you need to know what to look out for.
Unsecured personal loans are typically for borrowing anywhere from £1,000 to £35,000. Generally speaking loans are cheaper the higher the amount you borrow (as the lender is guaranteed more in interest repayments), although the upper limit for personal unsecured loans tends to be up to £35,000. Above that will usually be secured loans.
The main criteria to look out for when comparing loans is the APR, or ‘annual percentage rate’. The APR is what loan companies will advertise to you, and is an interest rate that includes fees and charges you will pay to give you an idea of the actual interest rate you will pay over the course of a year.
Loan providers are required by law to show you an APR so you can compare between different loans. The higher the APR, the more you will pay in interest over the lifetime of your loan.
Unfortunately, whilst APR is certainly the best way to compare different loans, finding out which APR you will be offered is trickier. A representative ‘APR’ shows you the interest rate that at least 51% of people who applied for the loan were offered.
That means that when you apply you may be offered a higher rate based on your credit history. Unfortunately you have no way of knowing this until you apply for the loan, which will leave a footprint on your credit file. Too many footprints and you may be turned down for loans in future.
The majority of loans make their money – and hence justify the lower APRs – by fixing the rate and term of the loan. So, for instance, if you borrow £1,000, you will know from the outset exactly how much per month you will be repaying and what your total interest payments are.
To counteract you paying back the loan early, loan providers may charge you early repayment penalties if you try and pay back too much of your loan too quickly. Some loan providers won’t charge this, so read the fine print.
You should also know the difference between secured and unsecured loans. Secured loans are linked to your property, so if you can’t pay back the loan your home may be repossessed, making them a very risky proposition.
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