In this guide, we explore the ins and outs of personal loans to help you consider whether one is right for your circumstances, and what the implications might be.
Personal loans, also known as unsecured loans, are used for several reasons. They can be used to consolidate other debts, to make a big purchase such as a car, or to fund a holiday. They're a type of loan that allows for flexible use (in that you can choose how you spend the money), offers short to moderate repayment options (generally 1-5 years, though they can run up to 10 years) and can be relatively quick to apply for.
Banks, building societies and finance companies can give you a personal loan regardless of whether you’re an existing customer or not, so your choices are usually quite broad when choosing a product.
However, though flexible, personal loans do sometimes come with high interest rates or high fees for missed payments. So depending on your circumstances, what you want to borrow for and for how long, it might be more appropriate to use a low or zero interest credit card instead. Whichever you choose, be sure to check the terms so you know how much your borrowing will cost overall and what you might have to pay if you don’t pay back on time.
With a personal loan, you borrow a fixed amount that is repayable in set monthly instalments, over an agreed period of time. Typically, this repayment period could be anywhere from 1 to 10 years. With a longer repayment term, you should expect to pay more in interest overall, but have lower monthly repayments. Personal loans usually have a fixed interest fee but, in some cases, lenders might offer variable rates. The amount you can borrow will depend on the lender, your personal circumstances and your credit history, though we generally find that personal loans are available up to around £25,000.
The process of getting a personal loan can actually be quite simple. All you need to do is approach a lender and submit your details. However, as mentioned above there is a range of lenders for personal loans, including banks and building societies. They all offer different plans and interest rates, so it is important to do your research and see what the best option is for your circumstances, the amount you want to borrow and, crucially, whether you can afford the monthly repayments.
Once you have chosen and approached a lender, they will perform credit checks and let you know if you are eligible.
If you miss your loan repayments, you will likely be charged by your lender and even lose out on a low or zero interest deal, where applicable. Your interest rate could be increased and your credit score could be negatively impacted.
If you feel that you are unable to repay a loan, you should speak directly to your lender as soon as possible, as they might be able to help you. In some cases, they can work out an easier repayment plan for you or let you take a ‘repayment holiday’ so you can take a break if you are facing financial hardships. Remember, it is always important to be honest and talk to someone if you are struggling financially. Not letting your lender know that you can’t repay your loan could lead to missed payments and increased fees, which will only add to what you owe. Plus regularly missing payments is likely to significantly affect your ability to get credit in future.
If you're concerned about your finances or are struggling with debt, the organisations on our Debt Helplines page can offer you additional support or advice.
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