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.
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.
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 your loan 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.
If you aren’t able to take out an unsecured loan, and you don’t want to take out a secured loan, then you may be able to get a guarantor loan. This is where someone guarantees to pay the cost of your loan repayments if you can’t.
Personal loan versus a credit card
A credit card can be a better option for borrowing smaller amounts of money with lower interest rates, over short periods of time.
Credit cards can offer 0% interest rates for a set period of time on your larger purchases. There are also 0% balance transfer cards available that let you transfer or consolidate a debt for a fee, and then pay 0% interest for a set time.
You will still need to go through affordability checks if you apply for a low interest credit card. You’ll need to see if a lender is prepared to lend to you, how much they’ll lend you and the interest rate they’ll charge.
Personal loan versus an overdraft
If you’re looking to borrow a smaller amount of money then you may be able to extend your current account overdraft to help pay for a purchase.
You may be charged a set amount of interest or a fee to use your overdraft though, so it’s a good idea to read the terms and conditions. Compare the interest rate and fees for both a loan and an overdraft to find the right borrowing option for you.
Compare personal loans
Comparing personal loans can help you find the best personal loan for you. Our loans search tool asks you a few questions on how much you’d like to borrow for your personal loan and how long you’d like to be paying the loan back.
We’ll then ask you about your average income and employment status to show you both affordable loan choices and loans you’re more likely to be accepted for. We’ll also ask you whether or not you’re a home owner so we can show you both unsecured and secured personal loans.
You’ll then be able to sort your loan results by chance of approval to compare loan deals by rate, monthly cost and terms and conditions to find the best loan for you.
It’s important to remember that the loan rates you see will be based on a soft check and only show you loans you’re likely to be accepted for.
The loan amount, rate and duration you may then be offered if you are accepted when you apply through a provider can be different to the loans you saw because they’ll be based on your credit report and financial situation.