A personal loan allows you to borrow a sum of money that you will repay, with interest, over an agreed period of time.
Personal loans are available from traditional high street banks, online challenger banks and specialist lenders. They can be used for many different reasons, such as home improvements, holidays, weddings, debt consolidation and major purchases, such as a new car.
The amount you can borrow will depend on the provider you choose and your personal circumstances, with options ranging from the low thousands to the tens of thousands. Terms (the length of time you have to repay the loan) typically range from one to seven years.
Types of loans
Generally speaking, the two main types of loan are secured and unsecured.
Personal loans are unsecured loans as they are not secured against any property or possession. Because this increases the risk for the lender, interest rates can be higher than with secured loans and there will likely be a lower limit on how much you can borrow.
Examples of unsecured loans include:
- Personal loans: These are offered by banks and alternative lenders. The amount you are offered and the term available will depend on your credit score and affordability checks, among other factors.
- Peer-to-peer loans: Arranged through online peer-to-peer platforms, these involve members of the public lending to others who need access to funds.
- Short-term loans: These are personal loans offered over short periods of time, usually up to a year. Loan amounts and terms are limited, and interest rates can be high.
- Payday loans: These are extremely short-term loans, which are repayable, usually in one single payment within a month. High interest rates are commonplace.
- Guarantor loans: Can be offered to those with poor credit ratings who have someone who will commit to repaying a loan if the borrower is unable to. Bear in mind that some lenders will require the guarantor to be a homeowner, which would make it a secured loan. However, this could put the guarantor’s property at risk should the borrower default on their loan.
Secured loans are often used to borrow larger sums of money over a longer period of time than with unsecured loans. Borrowers will put some property, usually their home, up as security, which reduces the risk for the lender.
How do personal loans work?
When you apply for a personal loan, lenders will need to know a few personal details, including your income and employment status and how much you want to borrow. They will review this information and carry out a credit check to help them decide whether to lend to you.
If your application is approved, the lender will give you all the necessary information about your loan, including the interest rate, the repayment schedule and any potential fees, so you should make sure you understand these terms before agreeing to the loan.
Once your loan is approved, the money could be in your account relatively quickly, sometimes within a day. You will then be able to spend the money, making your monthly repayments to the lender over the agreed period of time.
What are the advantages and disadvantages of a personal loan?
As with any credit option, there are pros and cons to taking out a personal loan.
- You can pay for goods or services up front and spread the cost over a longer period of time.
- You can apply for a loan and often receive the money relatively quickly.
- You may be able to borrow money at a lower rate than some other options
- Interest rates and monthly repayments will normally be fixed, so the amount you pay each month won’t change.
- A personal loan can have a higher rate of interest than some other finance options, especially if you have a less-than-perfect credit score.
- It may not be the best option if you want to borrow only a small sum of money.
- There is a limit to how much you can borrow.
- Missed and late repayments will harm your credit score.
How can I compare loans?
Our personal loan comparison table highlights key pieces of information about different loans, which can help you to work out what the best personal loan is for you. By clicking through on the options, you can also complete a soft check to see whether you are eligible for a loan from various providers.
When you are ready to find a loan, some of the main points you need to consider are:
- How much you can borrow from a lender.
- The minimum and maximum number of months you have to repay.
- If there are any early repayment charges or any other fees.
- The APR (annual percentage rate).
Most of these are fairly straightforward, but the APR can be more complicated to understand.
The APR tells you the total cost of the loan, taking into account the interest on the loan and any compulsory fees.
All lenders have to show a loan’s APR to help consumers compare loans on a like-for-like basis, and to reduce the risk of someone getting caught out by hidden fees.
The APR makes it easier to compare and find the cheapest loans, as you don’t need to work out how different interest rates and lender fees will affect the overall cost of your loan.
What do I need to know before applying for a loan?
Before you get a loan you need to make sure you understand all the risks involved. You could harm your credit score if a lender rejects your loan application or if you don’t make repayments on time, so only apply for loans if you are confident that you will be successful and that you can comfortably afford the repayments.
Some loan providers will allow you to check your eligibility for a loan with a range of lenders before you formally apply through a soft credit check without affecting your credit history.
Also think carefully about how much you need to borrow and how long to borrow for. If you choose to repay the loan over a longer term, your monthly repayments may be smaller but you will pay more in total because of the added interest that will build up. If you choose a shorter term, you will pay less interest overall.