Are you thinking of buying a car? Maybe you need a new washing machine or sofa? Or perhaps you want to jet off to sunnier climes for a well-earned break?
Personal Loan – Eligibility, Interest Rates…
Most of us can’t afford to pay for such big-ticket items out of our regular income. Instead, we need to borrow the money – and a personal loan might be the answer.
This type of borrowing is often referred to as an unsecured personal loan because you don’t need to provide an asset to secure the loan. With a secured loan, such as a mortgage, you provide an asset (your house) that becomes the property of the lender if you default on the loan.
The loan is issued based on the borrower’s creditworthiness, which means some people with bad credit may struggle to be accepted for an unsecured personal loan, or may be charged a higher rate of interest.
Fixed monthly payments
A personal loan, sometimes called an unsecured loan, is different from an overdraft or credit card because it allows you to borrow a fixed amount over a fixed term, usually at a fixed rate of interest.
When you search for personal loans with MoneySuperMarket, you can adjust the amount borrowed and the duration on our calculator tool to see how this would affect your monthly repayments. Each result comes with a clear explanation of how much you’ll be charged in interest over the term to give you a fully transparent understanding of the total cost of taking out a personal loan.
For example, if you borrowed £5,000 over three years at a representative rate of 3.9% APR and an annual interest rate of 3.90% fixed, you would pay 36 monthly instalments of £147.25. The total charge for credit would be £300.87 and the total amount repayable would be £5,300.87.
Why do people take out personal loans?
There are lots of different reasons why people consider taking out a personal loan. Car purchases and debt consolidation are the most popular reasons, but many use them for home improvements, marriage or other purposes.
According to our data, men apply for personal loans for cars at a greater rate than women. Women, on the other hand, are more likely than men to use their personal loans for debt consolidation and home improvements.
How much can you borrow with a personal loan?
The amount you can borrow with a personal loan will vary according to your circumstances and your credit score. Generally speaking, you could borrow up to £25,000 with a personal loan – but any more and you could be asked to put up an asset as security (such as property).
You should think carefully before securing other debts against your home, because your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
Interest rates vary, but generally speaking the lower the loan amount, the higher the rate of interest. You might, for instance, pay 12% on a £1,000 loan but only 7% on a loan of £7,000.
How much do peope usually borrow?
The amount of money people borrow using a personal loan can vary widely according to age. The 45 to 64-year-old age group borrows the most, with an average loan of £8,903. People aged between 65 and 74 aren’t far behind, while the 24-44 age band also tends to borrow highly. Younger people borrow significantly lower amounts.
Terms for personal loans
Lenders typically offer terms of one, three and five years – and it can be tempting to opt for a longer term in order to reduce the monthly payments. But this means you’ll end up paying more overall.
For example, if you borrow £5,000 over three years at a representative rate of 3.9% APR and an annual interest rate of 3.90% fixed, you would pay 36 monthly instalments of £147.25. The total charge for credit would be £300.87 and the total amount repayable would be £5,300.87.
Extend the term to five years – with the same representative rate and interest – and your monthly repayments would be £91.70, which is £55.55 cheaper each month. But you’d be paying over 60 installments and the total charge for credit would be £201.37 more than in the previous scenario. This means the total amount repayable would be £5,502.24.
The right loan term for your situation depends on the amount of money you borrow. In general, if you’re borrowing a low amount, you should choose a shorter loan term. It’s unlikely that a 5-year loan term is the right choice for people who are only borrowing £1000 or £3000, for example.
The rate you pay will largely depend on your credit score. Most lenders carry out a credit check when you apply for a personal loan and if you have struggled with debts in the past and have a poor credit history, you could be turned down or charged a higher rate of interest.
Low advertised rates
Watch out for low advertised rates as they are not guaranteed. By law, the rate on an advert must be given to 51% of successful applicants. In other words, up to 49% of successful applicants may pay a higher rate.
Personal loan fees
Some lenders charge arrangement fees, which can bump up the cost of credit. You should also beware of any early redemption fees should you choose to clear the debt before the end of the loan term.
Some borrowers take out a personal loan in order to consolidate other debts. Known as a debt consolidation loan, this is when you use the money from the loan to pay off high-interest debts accumulated on credit cards, store cards and/or other loans.
If the interest rate of the personal loan is lower than the interest rate of other debts, this can be a good way to reduce your overall repayments. It also allows you to repay your debt with one monthly payment instead of managing multiple debtors
Alternatives to personal loans
A personal loan can be a sensible option for many borrowers, but it’s worth considering the alternatives. For example, if you need a bit of extra cash to tide you over for a few days, you might want to ask your bank/building society about a temporary overdraft.
You can also use 0% credit cards to your advantage, either to purchase a one-off expensive item, or to transfer a balance and consolidate debts.
Compare personal loan rates
When you compare personal loans, make sure you look at the detail of each option. You should compare each lender based on a number of factors such as the interest rate, whether you’ll be charged an arrangement fee and if you can repay early without extra charges.
You can also compare personal loan lenders by how likely they are to accept you. We can tell you this using our Eligibility Checker tool, which asks you a number of questions about your personal circumstances to gauge your eligibility for each loan. It does this without harming your credit score.
It’s important to consider the personal loans that are most likely to accept you, because being rejected will leave a record on your credit report and lower your credit score. Furthermore, if you’re rejected for one loan you’ll probably want to apply for another – but each application is also recorded on your credit report and making too many in a short period of time will damage your credit score.