Finding the best ways to borrow Unsecured personal loans

Low cost personal loans

Personal loans offer a fixed interest rate over a set period, so can be good for planning your finances

How do unsecured personal loans work?

Personal loans are a good way to borrow for larger items over a fixed period. If you've got existing debt (for example on credit cards with a high APR), personal loans can be a handy way to consolidate borrowings. The interest rate (APR) is set when you take out the loan and the repayments stay the same every month for the term of the loan.

Interest rates

Interest rates on personal loans tend to be lower than those on credit cards, except for borrowing smaller amounts. APRs on personal loans tend to drop, the more you borrow.

For example, if you borrowed £10,000 over five years at an APR of 7.5%, that interest rate will apply for the whole five-year period, so long as you maintain your monthly payments. The monthly repayment on this loan would be about £200, the same amount every month.

The maximum you can usually borrow with an unsecured personal loan is £25,000. You may not be offered the advertised interest rate - when you make an application, the bank will credit check you (known as risk-based pricing). If you are an above average risk, the lender may reject your application, or may offer you a loan but at a higher APR.

Early repayment penalties on loans

If you want to pay more off your loan each month than is required, or want to pay it off early, some lenders might charge you an early settlement penalty, often equivalent to one or two months' interest.

If you're near the end of your loan term anyway, it might make more sense to stick to the original repayment schedule and keep the extra cash you have in a Best Rate savings account.

Secured loans and consolidation loans

Some loans are secured against your property. They might be worth considering if you want to borrow a larger amount of money, as their rates tend to be lower than for unsecured loans. However, it is crucial to be aware that your home will be at risk if you can't keep up repayments on a secured loan.

Some companies advertise consolidation loans on television, often using a celebrity endorsement to tempt you in. However, these loans can sometimes be secured loans (potentially putting your home at risk if you can't repay) and APRs can be very high. Make sure you check the interest rate, the monthly repayment and the length of the loan before signing up.

Choosing the best personal loan

Which? analyses the whole unsecured personal loans market to compile its Best Rate tables. Choosing a Which? Best Rate personal loan means you won't be paying over the odds.

It's also worth speaking to your bank as some only offer loans to existing current account customers and may be able to tailor a competitive deal for you. However, always cross-check the rate you're offered against Which? Best rate loan deals.

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