'Personal' and 'unsecured' are interchangeable terms for loans which are secured on your credit rating alone, meaning there is no direct risk to your property, car or guarantor if you're unable to keep up the repayments. As it's based on your credit rating only, you'll need to 'pass' the credit check the loan company will perform in order to obtain any money.
How much can I borrow, and for how long?
You're likely to find the maximum amount you can borrow is £25,000; assuming that your credit rating is high enough. Generally you can set the term of repayment from anything between one to ten years, meaning you have the flexibility to set it at a length where the monthly repayments are acceptable to you. You'll need to beware of how altering the repayment length may also increase (or decrease for that matter), the typical APR, which is the interest owed on the loan amount.
How much interest will I have to pay?
Naturally, this will depend on the amount that you borrow, the length you borrow it for – not to mention the provider you choose. Typically APR rates vary between 6% - 13%, which is a fairly large gap, but still much cheaper than credit cards which vary from 18% - 30 %. That being said, if you're looking for a short term loan for a few thousand pounds, there are currently credit card providers offering 18 months interest free for purchases, which is a no lose situation, providing that you stow away the money ready to pay off the card when the free period is up.
As a general rule of thumb with personal loans, you can assume that the longer you pay the loan off for the more interest you will end up paying, due to the nature of APR.
Types of Personal Loan
Personal loans can be classified into two varieties:
- Fixed rate: In essence you pay a fixed amount each month for the duration of the repayment period. This is the most common type of personal loan, and gives you the peace of mind of being able to maintain the repayments, assuming that your personal situation doesn't drastically change.
- Variable rate: The amount of interest you repay will fluctuate depending on the Bank of England base rate or market forces. This of course means that the amount you repay can rise or fall, meaning you pay more, or less than you originally budgeted for. If the interest rates rise too much, there's a risk that you may not be able to meet the repayments. On the other-hand, if they fall dramatically, your loan might turn out to have been a bargain
Things to look out for
Here are some common conditions you should also be aware of:
- Low headline base rates: The interest rate you're offered is based on your credit score, and by law providers only have to offer the deals they advertise to 51% of applicants. This in practice means that deals advertised as having very low rates are often only available to those with an impeccable credit score.
- Redemption fee: Some providers include what is known as a 'redemption fee' in order to offer better APR rates. This is basically a financial fine, should you wish to repay the loan early. Depending on the loan and your situation, this may be something that is acceptable, but you should at least be aware of the amount stipulated.
- Transfer fee: You may be required to pay a fee for the transfer of the funds to your account, especially if you want 'same day' service.
- Deferment/ Payment Breaks: Some providers offer deferment for payment commencement, as well as payment holidays to give you a break when finances are tight. Sounds great but bear in mind that interest will continue to accrue whilst you're not making repayments, so the total amount you're paying back will increase.