An introduction to personal loans
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.
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.
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.
Is it a good idea to get a personal loan?
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 also known as a homeowner 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.
Can I get a personal loan?
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.
What is a pre-approved loan?
Pre-approval is often spoken about in terms of mortgages and personal loans. Most often, you might receive a letter advising that you have been ‘pre-approved’ for a loan or credit card – while many of these mailshots tend to end up in the recycling, you may be able to consider the offer. But just what is a ‘pre-approved loan’?
Essentially pre-approved does not mean that your loan application will be automatically accepted – although many people wrongly believe that it does. In fact, this means that the lender is offering a loan pending full approval. In other words, even though you are pre-approved, there is no guarantee that your loan application will be successful.
So, what’s the point of being told you are ‘pre-approved’? Well, it’s important to remember that being ‘pre-approved’ means that the lender may be able to approve your application once you have made a full application. A lender may well have carried out a limited check and identified you as being potentially eligible for a loan or credit card.
In many instances, an invitation for a pre-approved loan means you have already cleared the first hurdle and the lender would welcome an application from you. However, any loan will still be dependent on a full application and you passing more stringent financial checks.
In some instances, online loan applications may have an automated first check that accepts your loan application in principle. Again, this form of pre-approval is not a conclusive agreement to provide you with the loan but rather a way of signalling that your loan application has passed the initial checks. Full approval will normally come after, once your application has been looked at in more detail.
Pros and cons of personal loans
- No security or collateral required.
- Fixed monthly repayments.
- Quicker to arrange than a secured loan.
- Can access much larger amounts than a personal loan.
- Can come with restrictions for part or early payment of the loan.
- The item you are using the money to buy or your home will be at risk if you fail to keep up with repayments.
- Often repaid on a variable rate so monthly payment may go up and down.
- Interest rates tend to be higher than for secured loans.
Who offers the best personal loan?
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.
How do I compare loans?
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.
How do I get a personal loan?
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.
What happens if I miss a loan payment?
Missing a loan repayment will normally result in a warning letter from the lender asking you to pay the missed repayment as soon as possible. If you miss more than one payment, you might find that the lender will demand payment to bring your account back into order immediately or even require you to repay the whole amount owed. If you fail to do this or simply ignore the lender, you may find yourself being taken to court over the debt.
When taking out a loan, you are essentially entering into an agreement with the lender that you will make regular repayments of a fixed sum for a specific length of time. Failing to make a repayment may put you in breach of that agreement. Missing payments may also mean an immediate referral to a credit reference agency and negative impact on your credit score.
Legal action is always a lender’s last resort. If you are having financial difficulties and cannot make the repayments, you must contact the lender as soon as possible so that alternative arrangements can be made.
Do I need insurance to cover my loan repayments?
Loan payment protection can be a valuable insurance to have as it can secure your loan repayments if you are sick or unemployed. But beware: Always read the small print of the policy before you take out the insurance.
How much can I borrow for an unsecured loan?
Normally, the maximum amount you can borrow on an unsecured loan is £25,000. Beyond this point, you will be unlikely to find a lender who will consider a loan without some form of security.
While £25,000 is normally the most you can borrow for an unsecured loan , this is not a guarantee that you will be approved for a loan of this figure. The lender will take into account your personal and financial details and history to make a decision on the maximum they will be prepared to lend you. This may be less than £25,000.
How long can I take an unsecured loan out for?
Normally personal loans tend to be taken out from between one and eight years (96 months). Longer terms might be available but will very likely require you to take out a secured loan instead.
As with the amount you will be able to borrow, the length of time you borrow funds over is subject to the lender’s agreement.
Can a student get a personal loan?
Students can indeed apply for an unsecured loan, however, the maximum amount you can borrow, and the interest rates charged will be heavily influenced by your current personal and financial circumstances, as well as your credit history. As a student, it is likely that your only income is from part-time employment so your loan will be judged on this. It is highly unlikely that any lender will consider a loan if your only income is a grant or a regular allowance from your family.
Can I pay my loan early?
Personal loans can be paid off early. Increasingly, mainstream lenders are allowing you to pay the balance of your loan before it ends, without charging you a fee. The terms and conditions of the loan will show you the fees that would apply.
Should I take out a loan to pay off my credit card
Using a loan to pay off a credit card that has a higher interest rate or larger repayments can be helpful if you are struggling to meet your debts. A debt consolidation loan can also enable you to combine two or more other debts – such as credit cards – into a single monthly repayment.
When taking out any loan, be sure that the interest rate you will be paying is less than the interest rate on your debts – it’s of little use to pay off one lender only to end up paying more through another. If you are struggling with maintaining your debt repayments, a useful idea is to take out the loan over a longer period – thus reducing the size of your repayments to a more manageable level.
Upfront fees
There may be upfront fees to pay. Work out whether these are worth paying, because if they result in a lower repayment, they may represent good value. Remember to factor in any interest you would have got on the money if it was in your bank account instead.
Loan Tips
- Always check your credit score before applying for a loan, and do whatever you can to improve it so that you will stand the best chance of being approved for the rate you want.
- In a similar vein, you should try to avoid applying for multiple loans at the same time, as this will lower your credit rating. If you want to know what you’ll need to pay back, you can request a loan quote before you complete an application.
- Aside from eligibility requirements and potential flexibilities (like repayment holidays), the only thing that really differentiates personal loans is their APR. Don’t be tempted to go with a provider just because they have a familiar name – finding the best loan rates should be your top priority.
- Make a budget so you know exactly how much you need to pay and how much you can afford to pay off every month. Keep in mind that there may be some charges attached to the loan, so you might want to borrow a little bit more than strictly necessary to cover these extra costs.
- Check the small print before you agree to a loan.
- Check to see if your loan provider allows overpayments, and whether these are penalty-free. While these won’t affect your monthly repayments, they will decrease the number of months it will take you to repay the loan, which will reduce the amount of overall interest you end up paying. Also, if you are thinking of paying back your loan early, check if the lender charges an early repayment charge, as this could affect how much you’d save by overpaying.