Personal loans: what you need to know
Personal loans explained
By Rob Goodman
Article 1 of 3
Personal loans explained
Find out how much you can borrow with a personal loan and what the difference is between a secured and unsecured loan.
If you're looking to borrow a lump sum over a fixed period of time, an unsecured personal loan could be for you.
An unsecured personal loan will usually be cheaper than a standard, and you can borrow more than with a current account overdraft.
But you need to know how these loans work, what to watch out for and how they compare with secured loans.
Personal loans: how much do they cost?
Personal loans are a particularly good way to borrow if you need a larger amount – as a general rule, loans tend to get cheaper the more you borrow, up to a maximum of about £25,000.
Loan companies must show the annual percentage rate (APR) charged on loans in their adverts. The APR takes into account any fees and charges that you may have to pay, as well as the interest rate. This is the rate you should use to compare deals – the lower the APR, the cheaper the loan.
Go further: see our round-up of the cheapest personal loans on the market to help you find the best deal
Personal loans: pricing
Bear in mind that all advertised loan APRs are 'representative', meaning that not all successful applicants will be offered that rate. At least 51% of borrowers must get the advertised typical loan rate, but you could end up with one that’s higher.
The problem with this risk-based pricing is that because you have to apply in order to find out the rate you’ll get, the provider will run a credit search and leave a ‘footprint’ on your file. Too many credit searches within a short period of time can adversely affect your credit rating.
Go further: check your credit report before applying for any form of credit to get a better idea of how likely you are to be accepted
Personal loans: fixed rate, fixed term
Most unsecured personal loan providers will lend you a fixed amount of money at a fixed rate, to be paid back over a fixed period of time. This means that you'll know from the day you take it out how much you’ll have to pay each month, when the loan is due to be repaid and the total amount of interest you'll be charged.
Usually, you can borrow between £1,000 and £10,000 with a personal loan, although loans for as much as £25,000 are sometimes available. Personal loans are generally paid back over a period of between three and 10 years.
Go further: peer-to-peer lending explained – find out about an alternative way to borrow
Personal loans: early repayment penalties
If you want to pay more off your loan each month than is required, or want to pay it off entirely with a lump sum before the end of the term, some lenders might charge you a penalty for the privilege. It isn't unusual to be charged one or two months' interest.
However, there are loan providers who don't charge early repayment penalties. If you think you might be able to pay off your loan early, it makes sense to go for one of these.
Go further: how to cancel a loan – we explain what to look out for if you want to cancel a loan early.
Personal loans: secured or unsecured?
Secured loans are backed by your property, meaning that your home could be repossessed if you're unable to keep up with repayments. For this reason, it's wise to tread very carefully when considering this type of borrowing.
Secured loans might be worth considering if you want to borrow a larger amount, as their rates tend to be slightly lower than unsecured loans. However, secured loans also tend to have higher minimum advances and longer minimum terms. It's important to remember that paying a lower loan rate over a longer period of time can be more expensive than taking out a higher rate loan over a shorter period.
Secured loans have variable rates, meaning that your provider can increase the cost of borrowing at any time. However, because unsecured loans are at a fixed rate, you know from the outset how much you'll be paying.
Go further: your loan options – find out about the different ways to borrow and decide which is best for you
- Last updated: July 2016
- Updated by: Rob Goodman