A personal loan is a form of unsecured and uncollateralised loan provided by high street banks, building societies, credit unions, and online lenders. This means you can borrow money without pledging your home or other property if you fail to make repayments. The UK personal loan industry is currently valued at over £25 billion annually, and many people are turning to this form of credit now that the worst of the economic recession is over. It is the second most popular option behind credit cards.
Personal Loans Explained
A personal loan is one of the simplest credit options out there for the average consumer, and the process typically allows you to request an amount of your own choosing and the duration that the loan will be outstanding.
This will be within a maximum and minimum offered by the lender. Usually the length of a personal loan falls within one and seven years, and the amount you can borrow usually falls between £1,000 and £25,000. These movable goal posts allow you to seek terms that work best for you. Anything less and a payday loan may be more suitable and anything more is entering in to the realm of secured loans.
Personal loans are repaid in regular instalments over the period of the loan term (commonly on a monthly basis), and the interest you are charged on each payment with be an Annual Percentage Rate (APR). This is usually fixed but can also be variable, depending on what you agree to.
Although lenders are obviously seeking the most amount of interest possible, they recognise that stifling a borrower from repaying early is not a good practise. That’s why most lenders will now allow you to make over payments (pay more than the current instalment) or pay the loan back in full before the term is complete, without any extra charges.
UK law also requires a 14 day grace period from the date you sign the contract, which allows you to cancel the agreement and return the principal without any interest or charges if you’ve had second thoughts.
Whether a personal loan is the right choice for you will depend on your financial situation, however even if you have existing debts you may find it easier to manage them by consolidating them with a personal loan. In some cases you may even be able to find a better rate than you are currently paying, especially if you have multiple credit cards.
You won’t usually be asked what you are going to use the loan for and there are no restrictions either. Common uses include repairs and home improvement, making larger material purchases, buying a car, going on holiday, or covering emergency expenses.
Before You Proceed
Because the economy is recovering the market has grown competitively in recent years, which has driven rates down as lenders are vying for your business.
It is important that you shop around and look beyond your bank and other large high street lenders, if you want to find the best deal. In today’s are there are now many smaller online lenders that not only offer better rates, but often have a faster and easier application process. In some cases funds can arrive within 24 hours if you meet all of the requirements and your information can be easily verified.
Before preceding it is wise to access you credit report so you have an idea of the type of loans you can go after. The higher your rating the better interest you will be offered.
Using certain price comparison services will allow you to do a ‘soft search’ which will let you know whether you are likely to be approved or not when you make a full application. It will also allow you to find some of the best deals and easily apply, without having to go to each lender one by one. Each price comparison site won’t cover every lender though, so it is also a good idea to use multiple comparisons and do your own research as well.
It’s not always about APR either. Your personal shortlist should also make note of minimum requirements, any undesirable loan terms, how long they take to fund the loan, and other features. Reading customer reviews will also give you a good idea about the overall customer service experience, especially if you are targeting a smaller online lender. Banks on the other hand tend to have a high standard of service by default.
As long as the loan you are applying for is affordable and you’ve done a budget (factoring in interest), you’re certain your circumstances won’t change and you have the means to make repayments, you’re using the loan for a purpose that won’t get you further in to debt, and the length and repayment terms suit your situation – you are well on track to having a positive borrowing experience.