Whether you need extra money for a car, home improvements, debt consolidation or even a holiday, a personal loan can provide a much-needed cash injection. But before jumping in and borrowing thousands, you should consider all the details carefully. Here's our guide to what you need to know.
What is a personal loan?
Offered by banks and other lenders, a personal loan is an unsecured loan, i.e. it will not be secured against your home, allowing you to pay back a fixed amount over a long period of time. How much you can borrow and at what interest rate will depend on your income and expenditure, and a credit check will be performed when you apply.
What are the benefits?
There are a number of pros when it comes to a personal loan. You will likely be able to borrow more money than you would on a credit card, and you can choose how long you would like to repay the loan, from 12 months to five or more years. Though the longer you take to repay the loan, the greater the interest charged, this can help to keep monthly repayments low.
On that note, when you take out a personal loan, you will be advised of the amount you'll need to repay each month, and this amount is fixed, meaning you can work your budgeting around it. Over-payments are usually accepted too, so you may be able to pay off the loan more quickly if your circumstances change, although it's worth remembering that if you repay more than £8,000 in any 12-month period, you may be charged by the lender.
What are the cons?
While personal loans often come with tempting interest rates, if you're borrowing a smallish amount, say, £1,000, you may find it's cheaper to borrow elsewhere. Since the advertised interest rate is often lower the more you borrow, many get sucked into taking out a larger loan than they really need, and since you'll probably need longer to pay it off, you could find yourself paying through the nose for that unnecessary borrowing.
It's also important to check exactly what interest rate you are offered. The ads and posters might say one thing, but once your credit risk has been taken into account, it could be much, much higher. If your credit rating is on the poor side, you may not be accepted, but that credit check will further lower your rating, so it's important to think carefully before you apply, especially if debt consolidation is the purpose. Also watch out for arrangement fees when you apply, since these can bump up the total cost of the loan.
Lastly, though unsecured, a personal loan can still land you in trouble if you miss payments, leading to a poor credit score and potentially court action, so it's important not to borrow more than you can reasonably afford for the whole term of the loan.
Finding the best deal
As with any financial product, it pays to shop around. It might be tempting to go for the safe option and borrow from your own bank or building society, but it's a competitive market, so do your homework. If you have a good credit rating, for instance, you might find that peer-to-peer lending offers you a much lower interest rate. Check with comparison websites to find the best deal on offer.
Finally, the majority of personal loans are equipped with a cooling-off period of 14 days, so if you get the wobbles or change your mind, you will have 30 days from the date the loan agreement was signed to repay the capital, along with the interest accrued.
Have you benefited from a personal loan, or got yourself into trouble with borrowing? Leave your comments below...