Personal loans guide - Loans - Guides |

Guides News brings you the latest financial & economic news & reviews of the best products in the UK by our team of money experts.

Personal loans guide

Category: Loans
Author: Tim Leonard
Updated: 14/06/2018

What is a personal loan?

Personal loans (or unsecured loans) are a way of borrowing money from a bank or building society, which you can use for just about any legal purpose (although most lenders stipulate that the loan shouldn't be used for commercial purposes). You choose the amount you wish to borrow and the period of time you want to repay the loan over, and the rate will be set accordingly. You then make regular monthly repayments to pay back the full amount of capital plus interest.

As each repayment contains an element of both the capital and interest, you are guaranteed to repay the loan at the end of the term, provided you make all the payments on time.

Different loan types

Unsecured personal loans are generally available for between £1,000 and £25,000 over terms of one to seven years. You don't have to put your house or other property up as security.

Secured loans work the same way, but are secured against your property, so you run the risk of having your home repossessed if you don't make the repayments.

Specific loan types, like car loans and home improvement loans, are just unsecured personal loans by another name.

How lenders make their money

Loan providers make money in three ways:

  • Interest - You pay a rate of interest on the loan which represents the lenders profit on the loan itself.
  • Fees – Some loans charge set-up or arrangement fees. If you want to repay the loan early, you may be charged an early repayment fee, and if you miss a payment, you can expect to be charged a missed payment fee.
  • Associated products – Lenders may try to sell you other products, such as payment protection insurance which generate an income for them.

Make sure you understand the things to watch out for by reading our guide on key factors to consider with personal loans.

What next?

How much do you need to borrow? Decide how much money you really need to borrow and the term of the loan. The rule of thumb is to borrow as little as possible and get it paid off in the shortest amount of time.

Compare: Our Best Buy loan calculator allows you to compare up to three products side by side to see all the features and pros and cons of each loan.

Work out your repayments: Our loan calculator lets you choose how much you want to borrow and the period of time you wish to repay it over. It also has a special sliding bar so you can easily change the repayment period and loan amount to see the best rates and monthly repayments.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.