Personal loans

If you want to borrow money and pay back an amount every month, a personal loan is one option. Here’s what you need to think about before you borrow and how to make sure you get the best deal for you.

What is a personal loan?

Personal loans are loans that a bank or other lender makes that are not secured against any asset such as your property. They’re also known as unsecured loans.

Personal loans – The pros

  • You may be able to borrow more than with a credit card.
  • Your personal loan repayments may be fixed amounts. That means your repayment amount is going to be the same every month and it’s easier to budget.
  • The interest rate you pay on a personal loan is also usually fixed (but not always).
  • You can choose how long you’d like to take to repay the loan. Remember the length of a loan will affect the amount you are charged in interest.
  • You can consolidate several debts into one personal loan, potentially reducing your monthly repayment costs. But be careful, as this may mean extending the length of the loan and so paying more overall.

You can make over-payments or pay off a personal loan in full before the end of your agreement without penalty.

However if you repay more than £8,000 in any 12-month period the lender may charge compensation (although the amount the lender can charge is limited by law).

Personal loans – The cons

  • Personal loans have higher rates of interest than some other forms of borrowing, particularly if you want to borrow a smaller amount, such as £1,000.
  • Because the interest rate may reduce the more you borrow, you may be tempted to take out a bigger loan than you need.
  • Older loans (taken out before 1st February 2011) normally have an early repayment charge if you want to pay off your loan early or overpay.

What is a personal loan cooling-off period?

You have a 14-day cooling-off period from either the date the loan agreement is signed or when you receive a copy of the agreement, whichever is later.

If you cancel, you have up to 30 days to repay the capital and interest.

What to watch out for with a personal loan

You may not actually get the interest rate advertised with the loan, which is known as the representative APR (or annual percentage rate).

This is the rate that you will see on posters or banks’ websites, but not everyone will qualify for it. In fact, loan providers only have to offer this rate to just over half (51%) of borrowers they lend to.

If your credit rating is less than perfect, you may be accepted for a loan but charged a much higher rate of interest than the representative APR. Your application for a personal loan will not necessarily be accepted.

Some personal loans have variable interest rates, meaning they can go up or down. If you’re only just able to afford the initial repayments you should avoid this type of loan in case they do go up.

Look out for any arrangement fees, which will make a loan much more expensive. Make sure you include them when you work out how much the loan is going to cost you.

Arrangement fees will be included in the APR – which is why you should compare APRs rather interest rates.

Think carefully before accepting any payment protection insurance (PPI) your lender tries to sell you. This is insurance that covers your loan repayments if you have an accident, are ill and can’t work or lose your job.

However, it’s been widely mis-sold in recent years and many of the policies on offer weren’t adequate or didn’t pay out at all.

Even if you do want this cover, you will almost certainly get a much better deal by checking prices with several different providers.

If you are already struggling to pay your bills and repay our debts, you shouldn’t take on extra debt such as a personal loan.

How to get the best personal loan deal

  • Don’t just accept the first rate you are offered by your bank or building society.
  • Shop around to see which providers are offering the cheapest APRs. Compare representative APRs (but remember that you may end up paying more if you have a poor credit history). A comparison website can help you do this.
  • Consider peer to peer loans especially if you have a good credit rating. These loans may offer lower interest rates and are available for smaller amounts. They are featured in most comparison tables.

Check the best personal loan rates on the Which? websiteopens in new window

Find out how much your loan could cost with our Loan calculator.

Secured personal loans

If you own your own home, you may be tempted to consider a secured loan.

However, this is a riskier option as your home is secured against the money you borrow.

This means that if you can’t repay the loan, the lender could force you to sell your home to pay off what you owe.

Did you find this guide helpful?