So what is a personal loan?
A personal loan is an amount borrowed from a lender to cover the upfront costs of life’s larger expenses – whether that be a wedding, car, holiday or some much needed home improvements (to name just a few). It’s not uncommon for these to be referred to as ‘unsecured personal loans’, as you can generally use the money to pay whatever your personal need is.
Personal loans are typically borrowed from a bank, credit union, private business or lender. Unlike secured loans, you won’t need to borrow against a personal item of any value, meaning the lender has no means of repossession if you can’t make your monthly repayments.
As such, lenders are typically more apprehensive about offering personal loans. Consequently, lenders will look to observe your credit score and history as a means of judging your ability to make repayments. As a rule of thumb, the worse your credit score is, the higher interest you can expect your repayments to be subject to.
What interest rates do you pay?
There isn’t a set rate of interest on personal loans, meaning your repayment rates will vary depending on the provider. Typically, these will be determined by the amount you borrow and the length of your repayment window.
Annual percentage rate (commonly referred to as APR) is often variable, meaning it can change month by month, and will be higher than rates supplied on secured loans. It’s vital to remember that while mainstream lenders may advertise attractive interest rates, these can (and most likely will) change once the lender has carried out a proper financial assessment and evaluation of your application.
Jeremy is getting married and needs some extra financial assistance. He applies for a personal loan boasting a reasonable credit history, and is offered £12,500 on a 60 month repayment window (5 years) at 3.7% APR (fixed). This means Jeremy would pay monthly repayments of £228.17, making the total repayable amount £13,690.20.
Is a personal loan right for you?
Personal loans boast both advantages and disadvantages, meaning a logical and balanced consideration of these in light of your own personal financial situation is of fundamental importance to anyone considering applying for a personal loan.
Advantages of a personal loan
- Quick solution – Once your application has been approved, your loan is often paid into your account within a few days – sometimes even quicker. Therefore, personal loans are a great instant solution for those looking to cover a payment or consolidate debts quickly
- Longer repayment windows – If your application is accepted, you’ll be able to choose how long your repayment plan will last. Though 1-5 years is the most popular option, longer term repayment windows are often available
- Rebuild a weak credit score – Regularly meeting your repayments can help strengthen a weak credit score, enabling easier borrowing in the future
Disadvantages of a personal loan
- Difficulty for self-employed people or bad credit holder – Because of the unsecured nature of personal loans, those with bad credit or those without a fix-term income traditionally find it harder to find a reasonable lender
- High rates of interest – As previously mentioned, rates of interest can vary vastly and are traditionally higher than those found attached to secured loans
- Damage your credit score – Just as successful repayments can improve your credit score, failing to meet any of your monthly payments can have a damaging effect on your credit score
Determining whether a personal loan is right for you is very much dependant on your own personal situation. There are various alternatives available that may be better suited to you:
- If your credit score or borrowing history prevents you from borrowing an unsecured personal loan, this doesn’t mean you won’t be able to apply for a secured personal loan. Lenders are more likely to offer a loan when they’re able to secure it against an item of high value like a house or car
- For those looking to borrow smaller amounts over a shorter time period, credit cards can often a better option. Low-interest credit cards can offer interest rates as low as 0% on set-rate repayments, however this still requires an affordability check
If you find yourself unable to cope with financial pressures, remember that help is available. Don’t hesitate to call the free national debt helpline on 0808 808 4000 or check out the Citizens Advice website here.