Personal Loans

Personal loans are by far the most popular means of borrowing on the loans market today. They are available through banks, building societies or loan companies. You can usually borrow up to the sum of £15,000 for a period of time that can run from six months up to 10 years. By and large, the larger the amount you borrow, the lower the interest will be, but rates do differ between lenders, from around 8% to 20%. The situation is not made easy by the fact that it is difficult to compare personal loan rates due to different lenders calculating the total cost of their loans (known as the annual percentage rate or APR) in different ways.

What’s in a loan?

Personal loans can be secured or unsecured. Secured loans are usually tied to your house - which means if you default, you may need to sell your house to repay the loan. Unsecured loans are not tied into anything, but if you don't make the repayments, the bank will blacklist you and you may find it difficult to take out other financial products, such as credit cards or a mortgage. Loans for specific items such as new cars are also available, often with lower interest rates. If you're taking out a loan for a car, tell your lender.

Most loans are re-paid by monthly instalments and the repayment period will be agreed before you get the money. This is usually a fixed period and you will have to pay a redemption penalty - an example being two months interest - if you want to pay it off sooner. The longer the repayment period, the more interest you will be paying, so go for the shortest one you can manage. Flexible loans, which let you borrow and pay back at will, are becoming more common, but the interest rate charged is often notably higher.

Why take out a personal loan?

There is no shortage of companies willing to offer an unsecured personal loan. But tread carefully. While there are a few providers who have been coming up with more flexible products lately, personal loans often mean tying yourself into paying back a large sum over quite a long period, with penalties (usually a fee of one or two months' interest) for clearing the debt early.
You may find an authorised overdraft serves your needs better.

The key advice is to shop around. Unfortunately, this is made more difficult by the fact that it is not easy to compare personal loan rates because different lenders calculate the total cost of the loan (known as the APR or annual percentage rate) in different ways.

The most important thing is to make sure you know exactly what the monthly payments will be, and how much you will pay back in total.

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