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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 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.

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CORONAVIRUS UPDATE

Unfortunately, due to the outbreak of coronavirus (COVID-19), some lenders have decided to temporarily stop offering loans through Compare the Market. As a result, we'll only be able to show you loans from lenders still available, and you may see fewer options than you would normally.
 
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.

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What are the benefits of personal loans?

Use the money for whatever you like – you could pay for a holiday, a wedding, medical care, etc. You’re not tied to a specific thing, unlike a home improvement or car loan.

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.

Consolidate existing debts – consider paying off multiple debts with one loan. A single repayment plan could make your debt more manageable. 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?

  • 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 will have a higher interest rate than secured loans – and your home or car may be repossessed if you can’t keep up with the 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 – 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?

You can typically borrow between £1,000 and £50,000 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.

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.

Personal loans can let you borrow up to £50,000, 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’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.

Do I need a good credit score?

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.

Read our guide to loans if you have a poor credit history.

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.

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 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.

Find out more about APR.

What happens if I can’t repay my loan?

You may be fined if you miss a loan repayment, and the lender may add additional charges and interest. If you’re having difficulties repaying your loan, in the first instance you should contact the lender. 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.

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.

Anelda Knoesen

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 a minute**

No impact on your credit score

See loans from a wide range of lenders

**On average, it can take less than a minute to complete a personal loan comparison through Compare the Market based on data in December 2019.

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