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A personal loan can come in handy if you need to borrow a large sum of money quickly, for instance if your car is on its last legs or your boiler has just packed in.
In some cases a personal loan could even work out cheaper than other types of borrowing, but you need to do your research and compare the options available to you carefully.
What is a personal loan?
A loan provider agrees to lend you an amount of money which you must then repay in monthly instalments, plus interest, for a set period of time until it’s fully paid off.
You can typically borrow up to £25,000 with a personal loan, although some providers will go up to £50,000. And the time you’ll be given to pay it back, also known as the loan term, is usually up to 10 years.
What is an unsecured loan?
An unsecured loan is just another name for a personal loan. It’s sometimes referred to in this way because you’re not offering an asset up as security, as you would with a secured loan.
This means that if you default on your payments, your home or car can’t be repossessed to pay off the outstanding debt you owe.
As there’s no security for the lender, you’ll usually need to have a good credit score to be accepted for a personal loan.
What can I use my personal loan for?
Before taking out a personal loan, consider your circumstances and if you can keep up with the repayments. A personal loan can have many uses, for example:
- Home renovations
- Buying a car
- Debt consolidation
- Funding a wedding
- Pay for a holiday
- Covering an unexpected vet bill if you don’t have insurance
The lender will want to know why you’re applying for a loan, some exceptions that may see your application fail are:
- Paying for a house deposit
- Business costs
- Gambling
- Lending to someone else
It’s important to be honest about what you’re using the loan for.
What happens when I apply?
When you apply for a loan, the lender will perform checks to assess whether you should be accepted and how much of a risk you are. Basically, they want to be certain that they’ll get their money back on time and in full.
The lender will see whether you fulfil their eligibility criteria, usually you must:
- Be aged over 18
- Be a UK resident
- Be employed
You’ll also need to pass an affordability check, which will analyse your income and any existing debt to see whether you’d be able to comfortably make the monthly repayments. A hard search on your credit report will be completed to discover your history of borrowing and paying back credit.
All these checks and assessments combined will give the lender the information they need to decide whether you’re a good investment who will return their money (plus interest) within the time limit.
Types of personal loans
Depending on your preference, you can choose between:
Fixed-rate loans
The interest rate on these types of loans remains the same throughout the entire loan term. This can be helpful for budgeting, and you’ll get no nasty surprises
Variable-rate loans
The interest rate can change, usually in line with the Bank of England base rate, this means that the amount you pay each month could potentially decrease, but it could also get more expensive if the rate increases
Advantages and disadvantages of unsecured personal loans
Before taking out a personal loan, you’ll want to think about:
Pros
- No assets, like your home or car, are in danger of being repossessed
- Can help you spread the cost of large purchases
- Flexibility around how you use the loan
- Can be a cheaper way to borrow than certain credit cards
- Could be easier to manage than multiple debts over different credit products
- You may be able to access the funds relatively quickly
Cons
- Strict repayment schedules that you must adhere to
- Using a 0% purchase or balance transfer credit card (depending on your needs) could be a much cheaper way to borrow
- Watch out for fees and charges which can increase the amount you owe
- Monthly repayments could become unmanageable if your circumstances change, for instance if you lost your job
- Failure to repay the debt could result in legal action being taken against you
- Lower loan amounts and shorter terms than if you chose a secured loan
Other things to look out for with personal loans
Make sure you read the terms and conditions of the loan carefully to get the full picture of what you’re signing up for.
You’ll want to watch out for any charges that increase the overall cost of your loan, this could include arrangement, late repayment and early repayment fees.
Another thing to remember is that you won’t necessarily receive the advertised loan rate. Lenders are only obligated to offer it to 51% of success applicants, which means your interest rate could be higher.
Consolidating debts
It’s possible to use a personal loan to pay off other existing debts that you have, whether it’s from credit cards, store cards, overdrafts or other loans.
Having debts with multiple lenders on differing interest rates can be hard to keep on top of, and you may be paying more than you need to.
Using a loan to consolidate the debt means that you only have one monthly payment to one lender, which is subject to a single interest rate.
Just make sure that you only pay off debts with a higher interest rate than the personal loan. You’ll also want to think about the reasons for your mounting debt and what can be done to stop it continuing in the future.
A loan may mean that you pay less interest, but if you’re struggling to make your repayments, the problem will likely persist even if the debt is consolidated.
Secured vs unsecured loans
There are a few differences between secured and unsecured loans, the main one being that secured loans use an asset, usually a home or car, as security. This asset can then be sold by the lender to repay the outstanding debt if you fail to make your payments.
This means that you’re less of a risk to the loan provider, as they know they can recoup the money. All this means that you can usually borrow more with a secured loan and the interest rate could be lower. You also can choose a longer loan term, which means cheaper repayments. However, this means you’ll repay more in interest overall, which can get expensive.
The trade-off is that you could lose your home or car if you fall into financial difficulty.
Alternatives
The other options to think about before taking out a personal loan are:
0% purchase credit card
You won’t have to pay interest on your spending for an introductory period. You need to make at least the minimum monthly repayments to ensure your 0% deal isn’t revoked and clear the balance before the period ends to avoid being switched to the lender’s standard interest rate
0% balance transfer credit card
You can transfer existing credit and store card debt over to it and pay no interest for a set period of time, which could be up to 34 months. Again, make sure the balance is repaid in full before the introductory period ends. Also, a fee will be charged, which is typically a percentage of the amount you’re transferring
0% overdrafts
Some current accounts have a 0% interest overdraft facility which can help you borrow small amounts for free
Remortgaging
If you plan on renovating your home, you may want to think about remortgaging. The amount you can borrow will depend on how much equity you’ve built up in your property
Frequently asked questions
It’s possible but your options will be limited, and you may need to use a specialist lender. Interest rates will be high, so it isn’t a cheap way to borrow.
You may want to think about other options or building up your credit score before applying for a loan to access the best rates.
All you have to do is:
- Tell us what type of loan you’re looking for, how much you want to borrow and for how long
- Let us know some details about you, including your address and annual income
- Compare using our smart search to find the loans you have a higher probability of being accepted for
- Click ‘Apply’ if you find a loan that suits you and finish off your application
Yes, you can pay off a loan early, but you may face an early repayment charge. Calculate whether it’s worth it or if it would be cheaper to carry on with the current repayment plan.
The first thing to do is contact your loan provider and see whether they can help you. This could be by adjusting the payment schedule, they might lengthen the loan term which would lower your monthly repayments, or you might be able to take a repayment holiday until you’re back on your feet.
Both these options will mean that you pay more overall, though.
You can also get free debt advice from StepChange, MoneyHelper or National Debtline. Their advisers can talk you through the different options available and help you come up with a plan to get debt-free.
No, car finance including personal contract purchase plans, hire purchase and leasing contracts are usually offered when you’re buying a car at a dealership. Personal loans are offered by lenders.
There are a few differences between these two options, for example using a personal loan to purchase a car means that you’ll own the vehicle outright and it can’t be repossessed if you fall behind on payments.
A soft search can be used to check eligibility for credit. We perform one when you compare with us to find the loans you have a higher probability of being accepted for.
Unlike a hard search, which is what happens when you apply for credit, a soft search will leave no mark on your credit report and isn’t visible to lenders. You can do them as often as you like without your credit score being affected.
Multiple credit applications close together, and failed applications will lower your credit score.
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