What is a personal loan and is it right for you?
Published Mon, Aug 6, 2012 Updated Tue, Feb 16, 2021
A personal loan is exactly what it sounds like, a loan which is intended for personal use. You can spend this on whatever you like, it can be for a car, home improvements or to pay off a holiday in full. Personal loans can be used as a tool to pay off credit card balances to then allow the individual to pay off the amount in smaller, more manageable installments. You can generally get up to £15,000 – but some lenders offer up to £25,000. The conditions of your loan and the approved amount will depend on the lender and your individual circumstances i.e your credit report and income.
Here are the key points to consider when choosing which loan to take out.
Loan periods depend on the lender and the amount you intend to lend. Some lenders will give you a loan for as short a period as six months, although a year is more common. This is very useful when you are lending with the purpose of buying a new vehicle or paying off a holiday in one sum. The maximum length is usually seven years, although some firms will lend over ten. This is more typical with larger loaned amounts, perhaps for extensive home improvements. Personal loans make the most sense for people who want to repay something over a few years. If you only need the money over six months, using your credit card probably makes more sense. Or if the money is for a shorter term then a payday loan may be a more appropriate lending option.
Banks and building societies offer personal loans at competitive rates. Loan firms are often a good point of call and have some competitive rates and lending agreements. Reputable firms generally charge penalties of no more than two months’ interest if you pay off the loan early. You should always look around the market, compare lenders and speak to each in order to narrow your search down to to get an idea of how much you would be entitled to borrow, repayment plans and what interest rates you would be offered.
Repayment rates are usually fixed for the entire term of the loan, which means you know exactly how much you will repay each month. The disadvantage is that you could be paying more than borrowers who take out a similar loan in six months’ time so it may be a better option to look at these types of loans – especially if you are intending on paying over a shorter term. Many lenders will insist that you take out a Direct Debit for the repayments. The crucial rate to look for is the annual percentage rate (APR), which includes the effect of any arrangement fees you have to pay although few lenders actually charge these today.
Before committing to any loan amount, work out the monthly repayments and ask yourself if you can see any reason why you may not be able to make the repayments in the foreseeable future. If you can think of any likely reason as to why you won’t be able to make the repayments for the duration of the term then this is not the option for you. On the other hand, a personal loan of the appropriate amount may be an ideal lending option.