What is a personal loan?
A personal loan is often referred to as an unsecured loan because you do not need to provide any security. These are the most common form of loan and the simplest.
Here, you are given money by a bank, building society or credit union and you pay it back over a set period. You will be charged a certain amount of interest and make make a set repayment amount each month for the agreed term.
How much loan can I get?
You will want to know how much you can borrow with a personal loan. Personal loans are usually between £1,000 and £25,000. Above this amount, you will be unlikely to find a lender who will consider a loan without some form of security, such as your home – which is used if you fail to keep up repayments.
At lower borrowing amounts, you may be considering taking out a personal loan in comparison to other options such as overdrafts and credit cards. Our personal loan calculator comes in handy for looking at deal comparisons.
Remember, just because the maximum is £25,000 for an unsecured loan, this does not mean that you are going to get it! Your personal details, financial and credit history will be considered by the lender to make a decision on the maximum they will be prepared to lend you, which could be much less.
Personal loans tend to be based on repayment terms from between one and seven years.
Taking out a loan for a longer term will mean you get a lower monthly repayment, but remember that the interest adds up as the years go by – and you will pay more overall. To pay less interest overall, we recommend that you choose the shortest term you can afford on the lowest rate you can find.
To pay off your debt even quicker, look for personal loan lenders who do not charge penalties if you repay early. Should extra money come in, you can be free of your loan in much less time without being disadvantaged.
You may also want to look at lenders who offer repayment holidays should the unexpected happen.
Which bank is best for personal loans?
The best bank is the one who gives you the best options for your individual circumstances taking into account how much you want to borrow, the available interest rate / APR to you and repayment criteria. You will find all of the information to help you make your decision here.
Personal Loans – the benefits
- You can use it for a number of things
- No security or collateral required, so no risk to your property
- Fixed monthly repayments
- Quicker to apply for
- Quick to arrange than a secured loan
- You may be less tempted to spend more (as opposed to getting a credit card or using an arranged overdraft)
As we have said, personal loans are the most straightforward, however, you still need to make sure it is the best option for you. One of the main benefits of a personal loan is that you can use it on any number of things, such as paying for a holiday, making some home improvements or to consolidate your existing borrowings.
With no security required, your home is not at risk if you fail to keep up with your repayments. For added peace of mind, you will have fixed monthly repayments which make it easy to budget for over time.
The application process is much quicker as the lender does not need to check the value of your security before approving you. After you apply you should know within 24 hours if your application has been approved, and then the money could be within your account in one or two days.
Personal Loans – the drawbacks
- Interest rates tend to be higher than for secured loans
- Some restrictions on what it can be used for
Personal loans are not the right choice for everyone in every circumstance. You won’t be able to use it for investments, share purchases, gambling, business-related items, buying land or paying for a house deposit.
Another drawback is that you might end up borrowing more than you need or can afford to repay. Banks won’t generally lend less than £1,000 or for shorter than 12 months. However, that doesn’t mean there are no options available to you – you could try peer-to-peer lending platforms, credit cards or an arranged overdraft which all might work out better for you if you need lower levels of cash for shorter time periods.
Some personal loans may require an application fee – be sure to check!
What happens if you don’t pay a personal loan?
All types of loans come with their own risks. That may be taking on debt that you can not afford to repay, causing damage to your credit record, incurring fees if you miss payments and even being taken to court if you fail to keep up with repayments (known as defaulting).
Many personal loans will charge a penalty for missing a payment, or something going wrong with your monthly payment. Additionally, any personal loans will charge a penalty if you want to pay off the loan early. This early repayment charge is a maximum of two months interest so it is something to consider but not stop you making early repayment.
However, at least with personal unsecured loan you are not putting any belongings at risk and your home (or other security) is not in danger of repossession.
How to calculate APR on a personal loan
How much a personal unsecured loan will cost depends on how risky the lender considers you to be, some of the things they look at include:
The amount you want to borrow
The length of time you want to borrow it for
Your credit record
You could be looking in the region of between 3.4% – 7.4% representative APR on personal loans between £5,00 – £10,000 in 2021.
Unsecured loans usually come with lower interest rates than credit cards and allow you to borrow more than on cards. Most loans will offer a fixed APR and will set the repayments in advance, which means that you know how much you need to pay back each month.
If your circumstances change, you won’t be able to change the amount you’re repaying to suit your new budget so this is a risk. Always talk to your lender if you think you are going to struggle to meet your commitments.
Loan payment protection can protect your loan repayments if you are off work or you lose your job but there is always small print so be sure to check it before taking out any new policies.
Interest rates for personal loans are typically lower than those on credit cards, they can be higher than those on secured loans, there is a bigger risk for lenders.
What is an APR?
One of the most important – and most confusing – pieces of financial jargon to learn is APR. APR stands for Annual Percentage Rate. When you borrow money, the APR is the amount of interest you pay on the outstanding debt per year, plus standard fees and charges like an annual fee if one is charged.
As all lenders must tell you what their APR is before you sign a credit agreement, it’s designed to show you how much your loan repayments are likely to be.
The APR is different from the interest rate. The interest rate is just the interest on the loan. The APR is more useful because it includes any extra fees or charges that get added.
Your APR gives you a better idea of how much you’ll have to repay for the total cost of the loan. Have you noticed that you nearly always see the word “representative” before the word APR? Representative APR tells you what APR most people can expect to get – by ‘most people’, we mean 51% of people. The remaining 49% either get a higher APR or their applications are rejected. Never base your personal loan budgeting on the representative APR, wait and see what is the APR the lender offers you!
The representative APR (i.e. annual percentage rate) is the rate that at least 51% of borrowers will be charged; the actual rate your lender offers you could be higher, depending on your credit score. This means that the monthly repayment and total amount repayable listed on any personal loan example should only be used as an indication of what you will be asked to pay back.
Are Personal Loans Taxable?
Personal loans are not considered taxable income. If you are borrowing from a friend or family member and paying them back with interest then it has tax implications for them.
Lenders must declare the received interest on their self assessment form as a taxable form of income. If you are not paying interest, it does not require the recipient or the benefactor to pay tax.
If a sum of money is given as a gift, rather than a loan, then it is free from inheritance tax up to the amount of £325,000. This is only the case if the lender lives seven years after the payment is made.
Exceptions to this rule are that a person can give up to £3,000 per year without paying tax and up to £5,000 if the money is given as a wedding gift by a parent to their child.
Other Types of Loan
Have you checked your personal loan calculations against peer-to-peer lending options? If you need a loan of £10,000 or more and you own your own home you could consider a secured loan – click here to compare. For those with a less than ‘good’ credit history, you can find out more about bad credit loans here.
Can you get a loan?
You must be at least 18 years old to apply for a loan in the UK.
You normally have to:
Be a UK resident, with proof of address
Be able to pay back the loan, with proof of your income
Pass a lender’s credit check
Students can apply for an unsecured loan but if your only income is from part-time work then your lender will use this to make a decision. If your only income is a grant or payments from your family you will be unlikely to be offered a loan at all.
How to get accepted for a personal loan
Ask the lender for a quote before you apply. If they have to do a credit reference check, ask if they can do a ‘quotation search’ or ‘soft search credit check’. These do not leave a mark on your credit record, where as an application search does.
Remember to consider if you can you afford to make the same repayment every month. If you need less than a few thousand pounds, you could consider using a credit card instead. Use our credit card calculator to make a comparison.
If your borrowing needs are very short term and you only need the cash for a few months or less than an arranged overdraft on your current bank account could be a more cost effective solution.
Remember that the process of all loan applications will involve a credit check. It is advisable to compare personal loans carefully before making your application to improve your chances of being accepted. Running several credit checks will lower your credit score. A lower credit score means you may be offered a higher-than-advertised APR.
Your Personal Loan Cooling-Off Period
With your loan you will have a 14-day cooling-off period from either the date the loan agreement is signed or when you receive a copy of the agreement.
If you cancel, you have up to 30 days to repay the money.
You can only be charged interest for the period you had the credit – all additional fees have to be refunded.
Can a Personal Loan be transferred to another person?
While it’s possible to take out a loan on someone else’s behalf, it carries a lot of risk. Make sure the person you are borrowing for can afford to repay you, or you could be saddled with an unwanted debt.
Normally, loans cannot be transferred to another person, especially personal loans. This is because personal loans are determined on a number of individual factors such as your credit score. However, under certain circumstances car loans and mortgages can be transferred to another person.
Calculator.co.uk Tips for Personal Loans
- Check your credit score before applying for a loan, and get it in the best possible shape
- Avoid applying for multiple loans at the same time, as this will lower your credit rating
- You can request a loan quote before you complete an application to find out what you’ll need to pay back
- Calculate how much you can afford to pay off every month
- Find out if there are any additional charges attached to the loan and make sure you can cover them
- If you may be able to pay off your loan early, check if the lender charges an early repayment charge