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Personal loans - key factors to consider

Category: Loans
Author: Tim Leonard
Updated: 09/11/2018

Personal loans - a step-by-step guide

As with any financial product, there are some basics to consider to ensure you're getting the right unsecured personal loan.

Our step-by-step guide will help you consider all the options open to you.

Secured or unsecured?

  • Personal loans (also known as unsecured loans) normally allow you to borrow up to £25,000. Some will now let you borrow more.
  • Unsecured personal loans don't have as much risk to the borrower as a second charge mortgage (or secured loan), but if you default on your repayments, your credit rating will be affected and you will find it difficult, and certainly expensive, to get credit in the future.
  • If you're looking to borrow over £25,000 most lenders will require security such as property, which means you will have to opt for a secured loan (also known as a second charge mortgage). These need a property as security, so if you don't have a property, or no equity in your property, you are limited to an unsecured loan only. Secured loans are also only available to those with an existing mortgage.
  • Beware! If you default on your secured loan repayments, the lender can file for repossession of your home, so they will get their money back one way or the other.

Are you getting the best loan rate?

  • Interest rates for personal loans are quoted in advertising and on your credit agreement as an Annual Percentage Rate (APR). All lenders should work out the APR based on the same calculation so you can compare the cost of the loan.
  • Lenders will have a range of APRs for different tiers of borrowing, but their lowest rates will tend to be for higher or mid-range borrowing amounts.
  • Adverts for credit, including personal loans, have to quote a Representative APR, which should apply to at least 51% of people who are accepted for a loan as a result of the advert. The actual APR you are offered depends on your personal circumstances. The more 'creditworthy' you are, the lower the rate you'll be offered.

Monthly loan repayments

  • Obviously you'll need to make sure you can meet the monthly repayments. Unsecured personal loans are on a fixed rate basis so you know what your repayments will be throughout the loan term. Secured loans tend to be on a variable interest rate, so be certain you can cope with any interest rate changes on both your first and second charge mortgages.
  • Use our unsecured loan calculator to compare what your monthly and total repayments will be and how much you will have paid in credit after repaying the loan. Just enter the loan amount you want to borrow and how long you wish your repayments to last and we'll compare the best personal loans in the UK.

Do I need insurance to cover my loan repayments?

  • Loan payment protection can be a valuable insurance to have as it can secure your loan repayments if you are sick or unemployed. But don't buy the PPI the lender offers you. Compare payment protection products or go to an independent broker who can get you a better product which is suitable for your needs. Beware! Always read the small print of the policy before you take out the insurance.

Upfront fees

  • There may be upfront fees to pay. Work out whether these are worth paying, because if they result in a lower repayment, they may represent good value. Remember to factor in any interest you would have got on the money if it was in your bank account instead.

What next?

Compare loan repayments and interest with our easy-to-use loan calculator

Borrow from £5,000 to £500,000 from the UK's largest range of secured loans


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.