What is a personal loan?
A personal loan is an amount of money you can borrow to pay for large expenses up front. This might be for a car, wedding, holiday, home improvements or for another reason. It can also be used to consolidate any debts you have into one monthly repayment.
You can get a personal loan from a bank, a credit union, a private business or a lender.
Car loans are the most common loan people aged 18-24 and 45-64 search for, and home loans are the most common loan people aged 65-74 and 75+ search for. Debt consolidation loans are the most commonly searched for loan for 25-44 year-olds, according to MoneySuperMarket data.
The most common reasons consumers are looking to take out a loan, according to MoneySuperMarket data from January – October 2018.
How do personal loans work?
A personal loan is often referred to as an ‘unsecured personal loan’ because you can use the money to then pay for whatever you personally need it for.
Although a lender may ask what you’re intending to spend the money on, you won’t borrow the money against an item of value. This means that if you aren’t able to meet your monthly repayments, the lender can’t get their money back from the value of a car or a house.
You’ll need a good credit score and credit history to get an unsecured loan. You can ask to borrow a large sum of money and the loan lender doesn’t have the security of a high value item to guarantee that the money they lend you will be repaid.
The average loan amount taken out by 25-44 year-olds is £12,092, according to MoneySuperMarket data.
The average personal loan amount taken out by age group, according to MoneySuperMarket data from January – October 2018.
What are personal loan interest rates?
The interest rate you’re charged on your personal loan will change depending on the amount you borrow and the term you want to pay it back over. MoneySuperMarket data found that 70% of consumers looking for a personal loan want to pay it back within five years.
You’ll find that the monthly interest rate you pay on your unsecured personal loan monthly repayments will be higher than on a secured loan. It can also change month to month because it will be on a variable rate.
Your credit score and credit history can also affect the interest rate you’re offered.
It’s important to remember that the interest rate you’re offered once you’ve applied for a loan may be different to the interest rates you see when searching.
This is because a lender will look into your credit history and financial situation when they decide whether to let you borrow from them. This will affect the amount they’re prepared to lend you, and the interest rate you’ll have to pay.
70% of people looking to take out a personal loan on MoneySuperMarket wanted to pay it back within one to five years of borrowing.
Most consumers searching for a personal loan are looking to pay it off after one to five years, according to MoneySuperMarket data from January – October 2018.
Why a personal loan might work for you
The benefits of a personal loan can include:
- Quick access to your loan money: your loan will usually be paid into your account within days of your application being approved – and sometimes even immediately. You can make your purchase or consolidate your debts quickly
- Repay over a longer period of time: you’ll be able to choose how long you want to be paying yourloan back for, from one to five years to longer
- Rebuild your credit score: a personal loan can help to rebuild your credit score and credit history if you meet your monthly repayments
What are the disadvantages of a personal loan?
Some things to be aware of when taking out a personal loan include:
- High interest rates: on your monthly repayments for an unsecured personal loan
- Car or home repossession: if you aren’t able to keep up your repayments on a secured loan then your car or home may be repossessed by the lender
- Difficulty getting a loan if you have bad credit or you’re self-employed: you might find it difficult to get approval for an unsecured personal loan if you have bad credit. The same applies if you’re self-employed because you may not have the guarantee of fixed income to meet the monthly repayments. If you are approved, you may then find that you aren’t able to borrow as much as you wanted
- Loan fees: you may have to pay an arrangement fee to get your loan or early repayment fees (redemption fees) if you want to pay off the balance quicker
- Missed repayments can affect your credit score: if you do miss any loan repayments then the lender can contact the credit referencing agency. The missed payment will be recorded on your credit report and can affect your credit score
Alternatives to a personal loan
If you aren’t able to get a personal loan, or you’d prefer to borrow money at a lower interest rate, then there are other finance options available to help pay for your larger purchase or to consolidate your debts.
Personal loan versus a secured loan
If you’re unable to get an unsecured personal loan because of your borrowing history, or you have a poor credit score, then you may be offered a secured personal loan. You take out a loan for your car or home improvements, for example, and the loan is taken out against a high value item of property you have – your car or home.
This gives the lender security. If you have had trouble paying back the money you’ve borrowed then they have a way of getting their money back if you aren’t able to pay back the loan. But this does mean that they can take the money out of your existing property, or even repossess it.
The amount of interest you pay with a secured loan will usually be fixed (fixed rate), so your monthly repayments should stay the same for the loan term. The interest rate charged can be cheaper than the interest charged on unsecured loan repayments.