A personal loan, also known as an unsecured loan, allows you to borrow a certain amount of money in exchange for paying a certain amount of interest, which will be charged as long as it takes you to pay off the loan. Once you’ve taken out such a loan, you will need to make a set repayment every month for a period of time that is previously agreed upon with your lender.
The representative APR (i.e. annual percentage rate) is the rate that at least 51% of borrowers will be charged; the actual rate your lender offers you could be quite a bit higher, depending on your credit score. This means that the monthly repayment and total amount repayable listed alongside any personal loan example should only be used as an indication of the minimum you will be asked to pay back.
You can use a personal loan for any number of things – to help pay for a car or other large purchase, to consolidate debts, or for some necessary home renovations.
Unsecured loans also tend to come with lower interest rates than credit cards and allow you to borrow more than on cards. Most loans will furthermore offer a fixed APR and will set the repayments in advance, which means that you can be sure of how much you need to pay back each month, and plan accordingly.
There are, of course, some disadvantages to this. If your circumstances change, you won’t be able to change the amount you’re repaying to suit your new budget, which could stretch your finances and make it much harder to get out of debt. And while interest rates may be lower than those on credit cards, they can be higher than those on other types of unsecure loans – since you’re not putting up any form of collateral, lenders bear a bigger risk of non-repayment if you can’t keep up payments.
In the same vein, many unsecured loans will charge a penalty not just for missing a payment (or something going wrong with your monthly payment), but also if you want to pay off the loan early. This early repayment charge is a maximum of two months interest so it is something to consider but not a deterrent to early repayment.
Aside from these charges, some loans may require a set application fee. Also look out for other restrictions, as they may make a loan more expensive than it needs to be. Loans are regulated by the Financial Conduct Authority (FCA), so while some loans will naturally be more expensive than others, you can be sure that the lenders are properly vetted and you will be offered some assistance if you run into serious trouble.