**On average, it can take less than 2 minutes to complete a personal loan comparison through Compare the Market based on data in November 2020.
What 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 £25,000.
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 a 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 a homeowner loan.
We understand that the outbreak of coronavirus (COVID-19) has caused financial difficulty for some of you.
If you have a loan and you’re worried about making repayments due to coronavirus, we’re here to help you understand the options available and the assistance some banks are providing.
How do personal loans work?
Personal loans are sometimes called “unsecured” loans, because they don’t force you to put up something valuable as collateral. This means you don’t need to risk something like your car or home to borrow the money.
First, you need to compare loan providers and products to find the right personal loan for you. Personal loans are usually limited to around £25,000, so decide how much you need and look at how the interest rate and loan period will affect your repayments. Once you agree terms on all of that, the lender will run a credit check on you to decide whether you’re eligible for the loan. Lenders run credit checks because they want reassurance that you’re responsible enough to borrow and pay back the money you’re asking for.
Once you’ve been approved, you’ll receive your money. You’ll then need to repay it (with interest) in monthly instalments, over the loan term. This can vary between one and 10 years.
Why it’s important to consider how much money you need
Knowing how much you need to borrow will help you decide where best to find that extra cash injection.
- If you only need to borrow a small amount of money for a very short time, consider using your interest-free overdraft, if you have one. If not, it could be worth looking at different current accounts that offer this facility.
- Credit cards with 0% interest on purchases could be worth a look, particularly if you need to buy something specific. As long as you pay back what you owe within the interest-free period (and make at least the minimum monthly payments on time), you can be smug in the knowledge that the credit hasn’t cost you a single penny extra.
If you need a larger sum of money, a personal loan could be the answer. You can usually opt to borrow a minimum of £1,000, with upper limits depending on the lender. Most will lend you up to £25,000, although some may go as high as £50,000.
The best APRs (annual percentage rate – this is the amount of interest, plus any fees, you pay on top of your loan) are reserved for customers with the best credit ratings. That’s why when you apply for a loan, you need to know that the APR you see might not be the one you get, unless it’s labelled as a guaranteed rate.
What are the benefits of personal loans?
Flexible terms – you can choose how much you want to borrow and how long you’d like to repay it. However, this does depend on your credit score and will affect the amount of interest you’ll have to pay.
Fixed interest rates and repayments – with personal loans, interest rates are usually fixed, unlike credit cards. And you’ll repay a fixed amount every month, which makes it easier to manage your budget.
Debt consolidation – consider paying off multiple debts with one loan. A single repayment plan could make your debt more manageable by combining your monthly payments into one that’s easier to understand. You may be able to secure a better interest rate, too, but it’s important to check carefully.
Apply and receive the money quickly – getting a personal loan is a much faster process than secured loans (also known as homeowner loans) or mortgages. You can apply online and if you’re approved, the lender will usually deposit the money within a few days.
What else do I need to consider?
If you’re looking for the best personal loan to suit your needs, here are some things to consider:
- A loan can be an expensive way to get money and isn’t without risk if you fail to meet the terms agreed.
- Unsecured loans can often have a higher interest rate than secured loans – and, while you won’t need to have offered collateral to secure the loan, lenders may take legal action to settle unpaid debts, if you fail to make your repayments.
- Generally, the interest rate is lower the more you borrow, so it can be tempting to get a bigger loan than you need.
- The interest rate advertised may not be the rate you’re offered (unless it’s a guaranteed rate) – make sure you understand the total cost of the loan before agreeing to terms.
- If you have a lower credit score, you may be charged a higher rate of interest on a personal loan.
How much can I borrow with a personal loan?
You can typically borrow between £1,000 and £25,000 with a personal loan. The amount depends on your credit rating and how much you can afford to repay. Some of the larger amounts may only be available for existing customers.
How can I find the best personal loan for me?
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.
The loan rate you’re offered could depend on the length of term you’re looking to borrow on, the amount you’re borrowing, as well as your credit score and history.
To get an idea of how loan rates work, here’s a representative example:
- Loan amount: £10,000
- Representative APR (Annual Percentage Rate): 2.9%
- Loan term: Five years (60 months)
- Monthly repayment amount: £179.07
- Total amount repaid: £10,744.20
- Credit available subject to status
Of course, this is just a representative example. For the best results, you should start by comparing personal loans using our comparison service.
Be aware that, you’re usually offered lower loan rates for longer terms. While the monthly repayments will be lower, don’t assume this is the best deal. While the rate may be lower, you’ll be paying that interest for a longer period, which usually means that you’ll pay more over the full loan period. Because of this, you should look for a low rate, with a monthly repayment that you can quickly, but comfortably, repay.
What are the alternatives to personal loans?
There are three main alternatives to personal loans:
If you’re having trouble being accepted for an unsecured personal loan, you may find you have a better chance of being accepted for a secured loan. Secured loans require you to offer something valuable as collateral, with common examples being your home or car. These are used to reassure the lender that you’re less of a risk, as they will be able to repossess your offered collateral if you’re unable to meet the terms of your loan.
Obviously, this comes with an increased risk. If you’re unable to repay, you could lose something valuable to you, even your home. However, if you’re confident you can keep up with your repayments, you may find this is a viable alternative to a personal loan. Secured loans also tend to offer lower rates, longer terms and higher borrowing limits. More things for you to consider.
If you already have, or are eligible to apply for one, a 0% interest credit card can be a useful alternative to a personal loan. With no interest charged (watch out for any agreed limits), you might be able to borrow what you need and repay it later with no added charge. Just make sure that you’re aware of the 0% expiration date, to avoid paying a higher interest rate on the amount borrowed, if you’re unable to pay off the debt soon enough.
We wouldn’t recommend this unless you have very few options, and should only be used as a short-term solution. If you can arrange an interest-free overdraft on your account, then it could be a great option for you. However, these can be rare, and the credit limits can be small, which may make it difficult for you to borrow the amount you need. The interest rates charged for overdrafts can be very high when compared to other lending options. You should avoid being in your overdraft for a long-term period.
How much does a personal loan cost?
Interest rates vary according to the size and duration of the loan.
Longer durations may attract lower rates, but repayments will be made for longer.
Borrowers with poor credit records will be charged higher rates.
From the Money team
“There are many reasons why people take out personal loans, and in some cases it can even help you improve your credit rating. Remember to always check the total cost of the loan and plan a budget to pay it back – only take out the amount you need and pay it back as quickly as you can to reduce the amount of interest.”
What details do I need to get a personal loan quote?
We’ll show you a list of personal loans. Once you’ve chosen one, you’ll go to the lender’s site to apply. You’ll need to have details such as:
- all the addresses you’ve lived at for the past three years
- your email address
- your employer’s details, including their address and phone number
- details of your monthly income and outgoings
- your bank or building society account details
Why use Compare the Market?
Get a personal loan comparison in under 2 minutes**
No impact on your credit score
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**On average, it can take less than 2 minutes to complete a personal loan comparison through Compare the Market based on data in November 2020.
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.
Personal loans can let you borrow up to £25,000, while credit cards don’t normally offer over £5,000.
For smaller amounts, to see what’s right for you, it’s worth comparing loans and 0% credit cards. You may also be able to borrow more at a lower annual percentage rate (APR/APRC) with a personal loan, than you would be able to on a credit card.
What happens if I miss a personal loan repayment?
You may be fined if you miss a loan repayment, and the lender may add additional charges and interest to your loan. If you were on a 0% interest rate, this rate may be lost and replaced with a higher one.
If you think you’re going to miss a payment, it’s important that you contact your lender as soon as possible. Don’t wait for it to happen before taking action. The sooner you discuss your options with your lender, the more flexible they may be.
Do I need a good credit score to get a personal loan?
You may be able to get a personal loan with a poor credit score, but it will affect the amount you can borrow and the amount of interest you’ll be charged. The better your credit score, the better terms you’ll be offered for a personal loan, as the lender will be more confident that you’ll be able to repay it as promised.
How long can I take a personal loan out for?
Personal loan terms are usually between one and five years. However, this varies between different loan providers, but it also depends on you. Depending on your application and the results of your credit check, lenders may offer you a longer or shorter loan term. Some personal loan terms can stretch to 10 years, but this is rare. Remember though, the longer the loan term, the more you’ll be paying in interest, even if the monthly repayments may be lower.
What’s the difference between a secured and unsecured loan?
Unsecured loans don’t require you to offer any collateral. You’re allowed to borrow the money on the basis that you agree to pay back your unsecured loan within the timeframe you’ve promised.
A secured loan means that you’re borrowing money using your assets as security – usually your house or car. This means that if you can’t pay back your loan, the lender can take possession of your asset.
What is a
What is a credit check and how will it affect me?
A credit check helps lenders find out about your credit history. You’ll need to provide the lender with information, including your address history and bank details, so they can make the check. This helps them assess whether you’ll be able to make loan repayments. They can only check if you give them permission.
Soft credit checks – for example, when you’re comparing loans – don’t affect your credit score.
Hard credit checks – for example, when a bank looks at your full credit report when assessing you for a loan – are recorded.
Too many hard credit checks in a short space of time can lower your credit score. This is because it indicates that you may have been turned down for loans or you’re trying to borrow more credit than you can afford from a range of different lenders.
What will lenders check?
Lenders will 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.
Can you be pre-approved for a personal loan?
Yes, being pre-approved for a loan means your loan application is guaranteed to be accepted. However, look out for whether the rate displayed is “representative” or “guaranteed”. If the rate is “representative”, you're guaranteed to be approved for the loan, but the rate offered to you may end up being higher than the rate advertised. Most pre-approved loans will show a “guaranteed” rate, which is more like a ‘what you see is what you get’ deal.
How long will it take to get my money?
With some lenders, you can get your money on the same day as your application. However, you can normally expect to get your money in about a week, but this can vary. Once you’ve applied (which doesn’t take long), your application will then be reviewed, which could take several days. Then, once approved, the money will be sent to you, which could also take several days.
What can I do if I need to borrow more than they'll lend?
If you need to borrow more than the lender is willing to offer you personally, or you need more than the typical £25,000 limit, then you might want to consider a secured loan. A secured loan can offer up to £100,000, but will make you offer something as collateral. If you then miss repayments, the lender can seize the collateral to repay what you owe. Examples of collateral include your car and home, but it depends on how much you’re borrowing.
Because of the need for collateral, you should think really carefully about taking a secured loan. If you miss payments, they’ll be well within their rights to take the collateral you offered, leaving you in a worse position than you started.
If you simply apply for multiple unsecured loans, these applications will appear on your credit report. This means lenders will see you already have an outstanding loan debt with someone else, which will mean you’re less likely to be approved.
Should I consider a peer-to-peer personal loan?
A peer-to-peer loan is borrowing money from another person (or group of people), rather than a normal lender. You can find peer-to-peer lenders on dedicated websites, but they are only the middle people. Interest rates vary, and can be affected by your credit score, but peer-to-peer lending can sometimes offer lower rates compared to traditional lenders.
Other than that, peer-to-peer loans work very similarly to traditional personal loans. You’ll repay the loan over an agreed period and a set interest rate. If you miss or make late repayments, you can face extra charges.
What is APR?
The Annual Percentage Rate (APR) is the cost of borrowing money over a year. It includes the interest on your loan as well as other charges you may have to pay, such as an annual fee.
The APR advertised on some unsecured personal loans is representative – which means it’s just an example. This means not everyone will be offered the APR advertised, although it must be available to at least 51% of successful applicants. If you apply for a loan that advertises a representative rate, you could end up with a higher APR than you’ve applied for.
However, other loans will offer a guaranteed rate, which means what you see is what you get if your loan application is approved.
What happens if I can’t repay my loan?
If you’re having difficulties repaying your loan, you should contact your lender as soon as possible. They may be able to support you with managing your repayments. Alternatively, you can contact a debt advice service – they’ll be able to help you organise a debt repayment plan with your lender.
If you’re unable to reach a compromise with your lender, you’ll likely be charged penalty fees for either partial, late or missed repayments.
Will UK interest changes affect my personal loan?
If the Bank of England base rate changes, that will influence the interest rates for loans, mortgages and other products. However, if your personal loan is agreed on a fixed interest rate, you don’t need to worry about your repayments going up during the loan term.