There are all sorts of reasons you might need to think about getting a personal loan. Perhaps you want to pay for a holiday, a wedding, to furnish a new home or to consolidate existing, expensive debts.
With interest rates low, borrowing from banks and building societies is pretty inexpensive. Our personal loan guide tells you everything you need to know about getting a loan and raising that all-important lump sum.
What is a personal loan?
There are a number of different types of personal loans. The one you choose will depend on your individual circumstances.
Unsecured personal loans
Unsecured personal loans are a formal contract between you and the lender. It allows you to borrow money on the basis that you agree to pay it back within the timeframe you’ve promised, making the agreed monthly repayments.
Secured personal loans
A secured loan is where you borrow money using assets such as a house or car as security.
So for homeowners, they can raise cash using their property as security or, in the case of some car loans, you can use your vehicle as the security.
This means that if you can’t pay back your loan, the lender can take possession of your asset.
Because of the reduced risk for the lender of you not repaying, you can usually borrow more with a secured loan compared to an unsecured one.
It also helps those with poor credit scores access a loan.
How much can I borrow with a personal loan?
You can typically borrow anything from £1,000 – £50,000.
What is a good amount to ask for a personal loan?
It depends on how much you need to borrow.
But that’s no reason to borrow more than you need – or to stretch the loan term longer than you need to.
The quicker you pay the money back, the less the loan will cost you.
What is a good reason to ask for a personal loan?
There are several reasons for taking out a personal loan – some better than others.
If the boiler breaks down or you need some serious repair work done on your home or car, your savings might not stretch to the kind of money needed.
With house prices soaring many people are deciding to improve their homes rather than move.
Expanding families might need an extension or loft conversion to provide an extra bedroom and bathroom. This kind of work can run into tens of thousands of pounds.
Those who have built up lots of credit card debt and personal loans might want to wrap it all into one new loan that has a lower rate of interest than credit card providers can offer.
Is it better to have a loan or a credit card?
An alternative option to a loan is to use a 0% purchase credit card. These cards offer an interest-free period for spending of up to around 18 months.
If you can pay the balance off in that time, you can avoid any interest payments altogether.
You don’t have to commit to a certain amount of borrowing either, only spending what you need up to the limit set by the card provider.
Monthly repayments are flexible as you will need to make a minimum repayment each month but can pay more if you can afford it.
Should you want to clear the balance early and stop borrowing, you can do so.
When to use a credit card instead
Credit cards are a good option if you can pay back the money within a shorter period of time.
This makes it a completely free loan.
Just be aware that after the 0% period runs out, the rate reverts to high rates of up to 37.7%, depending on the card you take out.
If you don’t manage to wipe the debt by the end of the interest-free period, there is the option of taking out a 0% balance transfer card to maintain the 0% interest rate for another fixed period.
Make sure you compare interest-free credit cards to get the best value deal.
Do personal loans affect credit score?
What credit score do I need for a loan?
A credit score ranges between 300 and 850. The number reflects how you’ve managed debt in the past.
Lenders will be looking for a score that shows you can successfully repay loans and pay bills on time.
But they don’t publicise what scores they require, so it’s up to you to play by the book and repay bills and loans as agreed.
Although having a low credit score limits your options, you may still be able to get a personal loan as there are specialist companies that will offer loans, yet at a higher rate of interest.
You might also consider a secured loan in this instance.
You can get a good idea of where you stand by checking your credit score before you apply for a loan.
Equifax, Experian and TransUnion will all give you a credit report free of charge.
Since lenders do not publicise the level of score they require for borrowing there’s no precise number to aim for.
Best way to get a loan with bad credit
Use comparison websites to find companies that offer personal loans for those with bad credit.
Rates might be high and typical amounts could be lower. But there are options.
If you need help with a mortgage and have bad credit, read our guide on applying for a mortgage with bad credit.
Finding the cheapest personal loan
As with any borrowing, you will want to shop around for the lowest rate of interest to avoid repaying more than you need to.
Checking which bank is the best for personal loans is a straightforward task if using a comparison service.
|Sainsbury’s Bank (Nectar card holder)||3.3%|
|Hitachi Personal Finance||3.8%|