How do personal loan repayments work?

Having extra cash is always a bonus and taking out a personal loan can really help to pay for big necessities – like a replacement car or home improvements. But long after you’ve got your shiny new car or made your home sweet home, that loan will still need paying back. So what are your repayment options and are there any alternatives?

How much will I end up paying back?

That depends on how much you’ve borrowed, how long for and how much interest you’re being charged. When it comes to choosing a loan, looking at the APR (annual percentage rate) is a good way of working out which loans are good value. The APR is the interest and other automatic fees that you’ll pay back on top of the loan amount. APRs vary and a lot of the time, the APR you’ll see advertised (the lowest ones) will be reserved for customers with top notch credit ratings.

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What are my loan repayment options?

You’ll usually be able to choose the number of months or years over which you can pay back your loan. You’ll be expected to make monthly repayments based on the loan amount and APR. Some loans will have variable rate APRs where the interest rate you will be charged can go up or down; unlike fixed rate APRs which remain the same throughout your loan period. If you have a tight budget, a fixed rate APR could l help you plan as it offers set repayment amounts with no little surprises.

You should also have the option of making overpayments to get your debt down quicker. Any loans taken out after 1 February 2011 can be overpaid without you being charged (unless you decide to pay back a whopping £8,000 in any one year). You can make overpayments on loans taken out before February 2011 but you may be charged up to two months’ interest by the provider.

But if you decide you don’t want your loan at all, you have 14 days to change your mind (starting from the date you received or signed the agreement, whichever is later).

Can I pay my loan off in full, early?

If you’re feeling flush or just won the lottery then of course, you have the option of paying back your loan in full. Ask for an ‘early settlement amount’ as this will show you exactly how much it’ll cost you to settle early including all the interest charges. But you don’t have to take up the early settlement option if you decide it’s not for you after all.

Of course, all lenders are different and each will have their own terms and conditions for overpayments or early repayment. But the one thing you must do is give your lender some notice – simply upping the amount in the next instalment or sending them a big, fat cheque won’t cut it, you’ll also need to provide the extra payment within a certain timeframe.


Repayment ‘holidays’

Some lenders will give you a repayment ‘holiday’ where you can take a break from paying back your instalments. Check the terms and conditions of your loan provider because they’ll vary – some will offer you up to two months holiday at the start of your loan agreement whilst others will let you take a break at any time. This sort of flexibility is great if you know that certain months are likely to drain you of cash – months where your car needs its service and MOT or even just before or after Christmas.

What if I can’t meet my repayments?

Life’s full of surprises and sometimes they aren’t good ones. If you know you’re going to struggle to make a repayment, contact your lender as soon as possible. You may be able to come to an alternative arrangement that works for both of you. Denial is never a good thing and in this case, denial could affect your credit in the future. Recurrent late or missed payments will get logged onto your credit report and potentially stay there for six years making it harder to get a credit card, a loan or even a mortgage later on down the line.

Are there alternatives to loans?

It depends on how much you want to borrow, but a credit card could be an alternative option if you didn’t want to get bogged down in monthly payments with lots of interest for the next five years. Look for credit cards with interest free periods – so long as you pay off your monthly balance on time you won’t be charged any more than you’ve borrowed.

Otherwise, make sure you comparethemarket for a loan that will suit you – we’ve made it easy to see what’s what by clearly showing the APR and key features; there’s no jargon and no hard sell – we just show it like it is – simples. 

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