What exactly is a personal loan?
A personal loan lets you borrow a fixed amount of money over a fixed term, usually at a fixed rate of interest. Most banks and building societies offer personal loans up to £100,000.
Repayments are usually spread over a period of between 1 and 10 years, depending on your personal circumstances, for example, how much money you earn each month and your regular monthly outgoings.
For higher values (generally over £25,000), the lender may want you to offer an asset such as your home or car as guarantee that they can use to get their money back if you don't pay your debt. These are known as a secured loan or homeowner loan.
What makes a good personal loan?
A good personal loan is one with low interest rates and an affordable monthly repayment, which will vary depending on your circumstances. A fixed interest rate loan could be a good option as your monthly repayments will remain the same throughout the term of the loan. If you think you’ll want to repay the loan early, look for a loan that won’t involve paying a penalty charge as a result.
Frequently asked questions
Is a personal loan better than using a credit card?
A personal loan can be a cheaper way to borrow money than a credit card, if you’re looking to borrow a lump sum over a set period of time.
You may also be able to borrow more at a lower annual percentage rate (APR/APRC) than you would be able to on a credit card. Personal loans can let you borrow up to £100,000, while credit cards don’t normally offer over £5,000, so if the amount that you need is more than this a loan may be the better option.
For smaller amounts, to see what is right for you, it is worth comparing loans and 0% credit cards. But if you choose the credit card option make sure you can pay off in the interest-free period otherwise it becomes potentially more expensive.
What should I consider when looking for an unsecured personal loan?
When looking for an unsecured personal loan, consider the APR of the loan, whether any penalties are charged for early repayment, and make sure you can afford the repayments.
APR - annual percentage rate is the total amount the loan will cost you, in terms of interest and charges, on top of the amount borrowed. The APR advertised on all unsecured personal loans is representative – which means it’s just an example. Not everyone will be offered the APR advertised, although it must be available to at least 51% of successful applicants. So, you could end up with a higher APR than you’ve applied for.
Early repayment penalties are charged by some – but not all – lenders. If you think you’ll want to pay off your loan early, it might be sensible to look for a lender that doesn’t charge these penalties.
Making every payment is really important. If you fall behind in making repayments, or stop them altogether, the provider could take legal action against you. Plus, it could damage your credit rating. This is why it’s so important to compare unsecured personal loans to find one most suited to you.
What should I consider when looking for a secured personal loan?
When thinking about taking out a secured loan, you should be sure that you can afford to make the repayments regularly and on time, otherwise you may lose your home. As interest rates can be variable on secured loans (it depends what type you take out), you'll also need to think about if you could carry on making the payments if interest rates went up.
Like unsecured loans, you'll need to consider the total cost of the loan including any fees and early repayment penalties.
Read more about secured loan.
What is a credit check and how will it affect me?
A credit check helps lenders find out about your credit history. This helps them assess whether you’ll be able to meet loan repayments on time and so whether to give you a personal loan. They can only check if you give them permission.
You’ll need to provide the lender with information, including your address history and bank details, so that they can make the check.
Credit Reference Agencies (CRAs) then supply records showing any late payments and missed payments, and if you’ve had any County Court Judgements (CCJs) against you. This shows how you've handled being given credit in the past and if you pay your things like your utility bills in full and on time.
Your credit details will affect the amount you can borrow, as well as the terms of your loan, such as the APR/APRC.
Your credit history can also alert lenders if you’ve applied for multiple loans, which could influence their decision. Although lenders can't see if you were accepted or not, multiple applications can suggest possible fraud. It can also suggest you have been turned down for loans or you are trying to borrow more credit than you can afford from a range of different lenders. None of these possibilities look good to many potential lenders. This is another good reason to thoroughly compare your loan options before actually making a loan application.
What else will lenders check?
Lenders will make their own checks too. They'll check your identity and address, and use any information that you've given in your application – such as your income and expenditure to help decide whether or not to offer you a loan. They'll also review anything they know about you already if you've previously had dealings with them.
Why compare personal loans?
Start a personal loan comparison with us and you can search by how much you want to borrow or the maximum amount you can afford to repay each month. Then enter the length of time you'll be repaying over, and you’ll get a table showing the options. You can see options for both unsecured loans and secured personal loans.
Please remember though, that however low the APR/APRC, a loan can be an expensive way to get money and isn’t without risk if you fail to meet the terms agreed. Think carefully whether the loan is essential and thoroughly compare all of your options before taking the step to apply.