A personal loan is a way of borrowing money from a bank or building society or some other financial services provider.
Typically you receive a lump sum and agree to pay back the loan over a fixed period with agreed monthly payments.
Usually a personal loan is unsecured - as opposed to a secured loan where the borrower provides a security against the money, usually their home.
A personal loan is based on the borrower's ability to repay, based on such factors as credit rating, income, financial outgoings.
With a personal loan, credit is normally offered for personal use as opposed to business use.
In the UK you can usually borrow up to about £25,000 with a repayment period of anything between half a year and ten years. The more you borrow the lower the interest rate is.
This is the fixed period - say 12 months - in which you agree to pay back the loan by making agreed monthly payments.
You will have to pay interest at a fixed rate on the amount you borrow. All the interest charges throughout the term of the loan and the repayment of the amount borrowed are added together and then divided into equal monthly payments.
There may also be an arrangement fee when you take out the loan. Weight this up against the cost of the loan and any alternative loan offers you receive. You may also decide to take out Personal Protection Insurance (PPI) so consider the costs of this carefully as well.
You may also decide to pay extra for Payment Protection Insurance (PPI). This insurance pays your monthly payments for you if you are unable to work because of illness or unemployment. Loan protection insurances can also cover things like accidents and hospitalisation. Think carefully about taking out PPI. Work out how much you will pay overall for this service and consider your wider finances and decide whether you really need it. If you do decide on PPI check the small print and see if the insurance covers your specific needs. Does it cover you for the exact type of work you do? PPI is not compulsory so don't be pressured into taking it out if you find it too expensive or you are confident you will not need it.
Check the terms carefully if there's a possibility you may want to repay early. Many lenders will charge you most of the interest that you would have paid during the full-term.
Some loans are restricted to particular uses such as home improvements.
Some lenders may require you open a current account with them if you are not already an existing banking customer. Although payment protection insurance is usually optional in some cases the loan provider may insist you take this out.
Watch out for personal loan lenders trying to persuade you to add to your loan half way through its term.
Try to be realistic about the repayment period. Is it appropriate? Do you want to be paying off a holiday for the next ten years?
Note that the cheapest deals may be for customers with the best credit or for large sums only. Always shop around to get the best rates and obtain several quotes.
You can usually pay off a personal loan before the end of the term but check what charges are made if you decide to pay off the loan early.
Often there will be a charge equal to at least part of the interest you would have paid had you kept the loan for its full term.
What you pay for a personal loan is usually expressed via an APR - Annual Percentage Rate. However note that different lenders calculate their APR differently. An APR takes into account the interest you pay and when and how you pay it.
APRs show the cost of borrowing on a standard basis so you can compare one APR with another. Basically, a loan with a lower APR should be cheaper than a loan with a higher APR.
The APR does not always take into account though charges you might have to pay such as arrangement fees, any insurance, early repayment fees etc. So you need to add those up separately to compare your costs. Use the APR as a starting point to compare loans. The APR is a result of a complex calculation and not clearly defined. There is no substitute for an estimate of how much you actually pay back. Total Amount Repayable (TAR) offers more of an accurate figure of how much you pay back.
They can be expensive and they lack flexibility. The main risk is though is that you cannot keep up the loan repayments.
Some personal loans are also secured - usually against your home. This means that, if you do not keep up the payments, the lender can sell your home to recover the loan.
Most personal loans are unsecured but if you do not keep up the payments the lender can take you to court. The court may then order you to pay off the loan in instalments but you could be forced to sell your possessions to recover the loan. This may affect your ability to take out a loan again by running up a bad credit rating. You will probably find it hard to borrow elsewhere once court proceeding are brought against you.
If you have a bank account your bank will normally give you one instantly.
A fixed schedule enables you to budget easily and your debt will be paid off within a set time so no confusion there.
Many lenders currently offer very competitive interest rates.
Personal loans for many are a good alternative to credit cards and overdrafts.
You walk away instantly with a large lump sum which you can spend on your home, holidays, a new car etc.
You should be fairly confident you can repay if you have a steady income. Staggered payments make it easy and you can always take out protection insurance if you are worried about this.
Of course it is. Personal loans can be a sensible way to borrow a substantial sum. Some lenders may also allow you to defer your first monthly payment for up to three months.
Most people arrange a personal loan with their bank or building society although other banks and financial institutions also offer personal loans. A personal loan can also be arranged with a retailer when you are buying a substantial item such as a kitchen or a car.
In fact, the variety of lenders offering personal loans has never been greater. There are around 70 different types of personal loan lenders. Even your supermarket will offer you one.
It may be the most convenient but be warned the high street may not be the cheapest place for a personal loan. High street banks and building societies are the traditional way of taking out a personal loan in the UK and offer comfort and familiarity and you can probably expect good levels of customer service.
Supermarkets, shops and Post Offices are increasingly offering good deals amongst a range of financial services. Again these business's locations offer convenience but they may also tempt you with some real bargains.
Online banks have the lower overheads so they usually charge less for personal loans. In fact, most of the lowest loan rates around are from online banks. As well as banking online, you'll also be able to phone the loan company if you have problems or need advice. Another advantage is that you do not have to be in the UK to manage your loan. Read Review Centre reviews and follow links for online loan providers recommended by consumers.
Borrowing and lending exchanges are co-operative which offer low cost personal loans.
They can do this because their costs are low compared to high street banks. People lend and borrow from one another directly and enter into a legally binding contract. The lending exchange manages the collection of repayments and uses exactly the same sort of recovery processes as the high street banks. Amounts borrowed or loaned are spread between over 50 plus borrowers and lenders to further reduce any risk of losses.