In 2019, unsecured personal loans hit the highest record ever, of £208 billion. Personal loans are increasingly popular in the UK and are borrowed to pay for big expenses such as home maintenance or to consolidate debt and pay off an existing loan. Read on as FamilyMoney explores everything you need to know about personal loans in the UK.
What is a personal loan?
Personal loans are a type of loan that allows you to borrow money from a lender with the agreement to pay the loan amount back over a set period in fixed monthly repayments. The lender benefits as they charge you interest at a fixed rate on the money you have borrowed, while the advantage for the borrower is that they can receive a lump sum upfront to help with their financial needs.
This type of borrowing is also known as an unsecured personal loan, as you are not required to put up collateral. This is in contrast to a secured loan, which typically requires you to provide an asset to the lender if you default on your loan.
What you could use a personal loan for?
There are many reasons one may need to take out a personal loan. Some of the most popular reasons to proceed with a personal loan for many are to purchase a car or to use it as a debt consolidation loan. However, many choose to use such a loan to fund home improvements or to help pay for an unexpected expense such as needing a new home appliance. Whatever the reason may be, by assessing the options available to you, you will be able to assess whether taking out a personal loan is your only option, and if it is, proceed to search for the best possible loan deal.
How do personal loans work?
With personal loans, unlike other types of lending, you can borrow the funds you need over a fixed term and generally at a fixed interest rate. As personal loan rates are usually set, a typical loan could be borrowing £25,000 over 60 months as the loan term is 3.5% APR. Having a fixed rate helps you remain assured that your loan repayment is a standard amount and that you can meet your monthly repayments. The total amount you may borrow depends on your circumstances as well as your credit score. It is likely that after a successful credit check, you may be able to borrow up to £25,000, but if you wish to borrow more money, your lender may request that you put up an asset against the loan.
It is essential to remember that when applying for a personal loan, the advertised ‘Representative APR’ must only be granted to 51% of successful applicants. Therefore, you may not receive the rate that lenders generally advertise. If the amount you need to borrow is low and you need funds urgently for only a few days, you may wish to seek financial assistance in the form of an overdraft via your bank or consider using a payday loan from a direct lender.
Compared to using a credit card, however, an unsecured personal loan can be a much cheaper way to borrow money over a set period. Furthermore, you would be able to borrow more than you could with a credit card, payday loan, or overdraft. However, it is vital to remember that a 0% spending card may also be a worthwhile option for smaller amounts.
Compare UK personal loan rates for the best deal
There are numerous aspects to consider when researching personal loans. You should especially pay attention to the interest rate that is offered, whether some additional fees or charges apply at any stage of the loan, and also if you have the option to repay the loan early without any financial penalty.
Having a fixed rate loan helps you remain assured that your payments are a standard amount on a monthly basis.
By using a loan calculator and checking your eligibility for a personal loan before you proceed to apply, you would be able to gauge the type of loan you could continue to apply for without harming your credit score. This is important as a rejection of your application will result in a penalty for your credit rating.
Remember that it is better only to borrow the amount you need to meet your immediate needs and that you are confident that you will repay your loan. Individual lenders will present you with lower interest rates when you choose to borrow more money; however, it remains vital that you carefully inspect the terms of the agreement before deciding to apply. Finally, make sure that you are only dealing with authorised and regulated lenders.
If you struggle getting approved for a personal loan, pawn shops are a great alternative to personal loan lenders. They come with higher interest rates than high street banks but significantly lower than high-cost credit like short term loans, and these loans are very easy to get approved for.
Common questions about personal loans
Note: You are entitled to a free credit report from credit reference agencies in the UK. By checking for errors and notifying the CRA’s you can significantly build up your credit score.