Types of personal loans
What are personal loans?
A personal loan is a way of borrowing money over the longer term usually at a fixed rate of interest. Personal loans are often used to pay for large purchases, such as a car, home improvements or to pay off more expensive borrowing.
Unsecured personal loans are not secured against something you own, like property or a car. With an unsecured personal loan you borrow a fixed amount for a set period and the rate of interest is usually fixed. You can usually borrow from £1,000 up to £25,000 for between one and seven years depending on the provider.
At the end of the loan the debt is repaid in full as long as you have made all the repayments. You know from the outset how much you’ll have to pay each month, for how long and how much interest you’ll be charged for the loan.
How to get the best rate
The interest on unsecured loans plus any charges is expressed as an annual percentage rate (APR). You can use the APR to compare the cost of loans. At least 51% of people accepted for the loan have to be given the advertised rate or lower. This means you could be offered a loan which charges a higher rate than advertised.
Each time you apply for credit the lender will look at your application and usually check your credit record with one or more credit reference agencies before deciding if it will lend to you. The credit search is recorded on your credit file. Too many credit searches in a short period can make it more difficult to get further credit.
Comparison sites are a good way of comparing loan rates. Some comparison sites let you search for a loan using a soft credit search that does not affect your credit rating so you can see which loans you are likely to be accepted for and at what interest rate. Some lenders will also let you do a quotation search so you can see if you will be accepted and at what rate without a credit search being recorded.
Some of the lowest interest rates for loans are offered by banks to their current account customers so it may be worth seeing what your bank will offer you as well as shopping around.
Early repayment penalties
When you take out a new loan there’s a 14-day cooling-off period during which you can cancel and repay the loan without penalty.
Once you’ve started paying back a loan you may decide you want to pay it off early. You could make overpayments or pay off the whole loan with a lump sum.
If you took out a personal loan before 1 February 2011 your lender may charge you a penalty of one or two months interest or more if you pay it off early.
If you took it out after 1 February 2011, you can pay off your loan in part or full without any extra charges, as long as you don't pay off more than £8,000 in a 12-month period. If you pay off more than this, the most you can be charged is 1% of the amount you paid (or 0.5% if there is less than a year to run on your loan).
When you take out a loan ask your lender about early repayment penalties.
Other ways of borrowing
Secured loan. With a secured loan you borrow money using your home as security. If you don't keep up repayments you risk losing your home as the debt is secured against it. Interest rates tend to be variable which means they could increase significantly during the course of the loan. Secured loans usually last from one year up to 30 years and you can borrow from around £3,000 up to £100,000 or more in some cases.
Credit card standard interest rates are generally higher than personal loans but you may be able to use a 0% purchase credit card to make a large purchase up to your card’s credit limit and pay no interest for up to around two years. Also a 0% balance transfer card could mean you transfer debt and pay no interest for up to around three years with a balance transfer fee of 1% to 3% of the balance transferred.
Credit unions offer loans and savings accounts - interest rates on loans can be a maximum of 42.6% but may be much lower. Authorised overdrafts are flexible and are much cheaper than unauthorised borrowing.
Peer to peer loans are a relatively new way of borrowing and lending money without using a bank. Like credit union loans you can normally repay peer to peer loans without penalty.
How to get help if you’re worried about debt
If you’re worried about your finances, borrowing more money is rarely if ever a good idea. Consolidating your debts can sometimes be a good way of reducing the amount of interest you have to pay and you may be able to pay off your debt sooner. But it can also get you further into financial difficulties. Before you borrow any money it’s often a good idea to get some free debt advice from independent organisations such as Citizens Advice Bureau, StepChange and National Debtline.