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.
- You might be able to borrow more than with a credit card.
- Your personal loan repayments might 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’re charged in interest.
- You can consolidate several debts into one personal loan, potentially reducing your monthly repayment costs. But be careful, as this might 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 might charge compensation (although the amount the lender can charge is limited by law).
- 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 might reduce the more you borrow, you might 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.
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 might 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 might offer lower interest rates and are available for smaller amounts. They are featured in most comparison tables.
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Secured personal loans
If you own your own home, you might 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.