Getting a Personal Loan

10th Jan 2024

A personal loan, also known as an unsecured loan, involves borrowing a specific amount of money from a lender with the agreement to repay it over a fixed period through regular monthly instalments. These loans are "unsecured" because they are not backed by collateral, such as a car or a house. How much you can borrow on a personal loan, and what interest you will be asked to pay on the money which you borrow will depend on many different factors, the most important of which is your credit score. Everyone has a credit score, which is calculated based on your past behaviour managing credit cards, loans, and other forms of credit.

Key Points About Personal Loans

• Purpose - Personal loans can be used for various reasons, including home improvement, buying a new car, covering wedding expenses, handling emergencies (e.g., car or home repairs), or to consolidate other credit with higher interest rates into one lower payment.
• Repayment – when you take out a personal loan, you agree to repay the loan amount along with interest over an agreed-upon period. The interest rate and repayment terms are typically fixed, making it easier for borrowers to budget as you pay back the same amount every month.
• Interest Rates - Lenders charge interest as a fee for providing the loan. The interest rates can vary based on factors such as the borrower's credit history, income, and the loan amount. It's always important to shop around and compare rates from a range of different lenders to make sure you are getting the best deal.
• Loan Amount – The amount you can borrow depends on various factors, including your creditworthiness, income, and the lender's policies. Generally, personal loans are available for amounts ranging from a few hundred to several thousand pounds.
• Term – any personal loan will have a fixed term, or the length of time over which you pay the loan back. A short repayment term might mean you pay less interest overall, but your monthly payments are higher. Conversely, taking a loan over a longer term might reduce the monthly payments, but mean that overall, you are paying more.
• Credit Report – people with high credit scores and clean credit reports will generally have access to personal loans with better terms and lower interest. If you are finding you can only access expensive loans, could improving your credit score help?
• Early Repayment – check the terms and conditions of your loan product to see whether you are allowed to pay back the loan early. If your financial situation changes, it can be advantageous to be able to pay the loan off more quickly.

If you are considering a personal loan, it's important to shop around, compare offers, and understand the terms and conditions. Always run a soft search or eligibility check to evaluate your chances of being accepted before making a firm application which will leave its mark on your credit report. Additionally, make sure the loan amount, interest rate, and repayment terms are what you are looking for – it’s easy to be tempted to take more than you really need.