Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk

A simple guide to personal loans

Looking for a personal loan? We have information to help you choose the best long and short term unsecured personal loans with low monthly repayments.

If you are thinking about taking out a personal loan, this guide will explain what to consider and what to look out for before you apply. It explains the options you have and also has some useful background information.

What are Personal Loans?

Personal loans are designed to cover larger purchases such as holidays, cars or home repairs, they allow you to borrow a lump sum that you pay back in instalments over a set period of time. Long term loans are available and you can also choose to pay over a shorter period of time.

What types of personal loans are available?

There are two main types of personal loan available: Secured and unsecured. You will also need to choose whether you want to take out a loan long term or short term.

Secured personal loans.

If you are a homeowner and need to borrow money for a large purchase, a long term secured personal loan is one available option for you. Using your home or any other item of significant value as collateral means that if you fail to make repayments, the lender can repossess your property to regain their losses. As a higher risk choice, this option must be considered carefully. If you only need a loan of a small amount, you may be better considering other borrowing options.

Unsecured personal loans.

An unsecured personal loan is offered by the lender without the need for collateral. Depending on your income and personal circumstances, you can be offered up to £10000 or more, as long as you can afford the interest and repayments. This option can cost more but is more widely available to non property owners.

Things to consider.

Choosing the best kind of personal loan doesn't have to be difficult, there are a range of price comparison sites that allow you to compare interest rates and other conditions. Before you start to look for loan providers, you might like to ask yourself these questions.

  • How much do you need to borrow?

The amount you borrow will effect the interest rate and the length of time the lender gives you to repay the money.

  • How long do you need to pay it back?

The amount of time you take to repay the loan will effect the interest you are offered by the lender. It will usually cost more to borrow over a longer period. If you choose a long term loan and a higher amount, you will often be offered a lower interest rates.

  • How much interest can you afford to pay?

The interest on your loan will be part of the amount you pay back in each instalment. You need to make sure this is something you can afford based on your income and outgoings. When comparing long term vs short term loans, you will notice a big difference in interest rates. Unsecured long term personal loans of a higher amount will often have lower rates than short term personal loans, especially those directed at individuals with bad credit.

  • What is your credit rating?

Lenders use credit ratings and credit scores to check on your personal finance situation. Your rating is based on things like your income and occupation as well as your borrowing history. If you need a long term loan for poor credit, your options will be more limited than some, but it is still possible to get next day personal loans from some providers.

  • Do you want a secured or unsecured personal loan?

If you are a homeowner, you have a choice between two types of loan. Secured can be a cheaper option but is higher risk whereas unsecured can cost more but does not require any collateral. Long term unsecured personal loans are usually quite competitive in terms of the interest rates that lenders charge. Most will be cheaper than an average credit card, but this depends on the amount you borrow and the length of time you take to pay it back.

Choosing a lender

There are a range of short and long term personal loan providers to choose from so it makes sense to shop around and compare before making a final decision. Banks and building societies almost always offer this kind of borrowing option but recently supermarkets, online companies and other high street businesses have started to offer this service as well. Using comparison sites can be a quick and easy way to work out which loan is the best value, they can also tell you how likely you are to be accepted before you apply. It is worth remembering that some long term loan providers do not show up on comparison sites, so you may need to visit their own website to get the best offer.

Important reminder

Now that so many different high street and online lenders can offer personal loans, it can be easy to fall pray to scams or illegal practices. The best way to check if a lender is legitimate is by visiting www.fca.org.uk. Every legitimate loan provider must be registered with this organisation.

What are personal loans used for?

Some people use them to pay for holidays or house repairs and other people use them to meet the cost of one off purchases like buying a new laptop or TV. Some people choose a cheap long term personal loan with a low interest rate to pay off credit cards or store cards as well.

Who can get a personal loan?

To be considered, you will need to be employed or have enough regular income to afford the repayments. Almost all professions are now considered by the majority of lenders but some providers will require you to be earning above the national minimum wage. There are some providers who offer long term loans for people with bad credit, but do be aware they charge very high rates of interest.

Advantages of personal loans

  • Fixed interest rates

Most lenders offer an interest rate that will stay the same over the course of your repayments, this means the amount you pay will stay the same. This is not always the case, so it is important to check this before accepting.

  • Good for large purchases

If you need to buy something that costs more than the credit limit on any existing cards you may have, this option allows you to borrow a larger amount.

  • Flexible to suit your budget

You can choose how much you would like to pay back each month which means you can factor this in to your budget alongside essentials like utility bills and rent or mortgage payments.

  • One payment instead of several

Some people use personal loans to consolidate their existing debts from credit cards or other borrowing such as overdrafts. This means instead of paying a number of smaller payments on different dates, you can make one larger payment on a set date each month.

  • Get your money quickly

Almost all lenders offer an online application service, meaning that you can be approved for a loan and have the money in your account within a matter of days, sometimes even within 24 hours.

  • Pay off your loan early

If you want to make extra payments to pay off your loan sooner, you can do this at any time. This means you will pay off your loan faster. (Some companies will charge an additional fee for early repayment.)

Disadvantages of personal loans

  • You may borrow more than you need

Some lenders will charge higher interest rates for smaller amounts of money. This means you might be tempted to borrow more. Be sure you can afford to pay back what you borrow.

  • They can be expensive

Although it can be a quick and easy way to get money into your account, some lenders will charge high interest rates, especially if you want to pay back the loan quickly or borrow less.

  • Missed repayments can damage your credit score

If you do not keep up with repayments, your loan provider can charge a penalty fee and your credit rating can be damaged. Remember to set up a direct debit or standing order to ensure no payments are missed.

  • High interest rates can make debt worse

If you have a poor credit rating you may only be eligible for loans with very high interest payments. Be aware of how much you will need to pay back in total to avoid any nasty surprises.

What is APR?

APR stands for Annual Percentage Rate. That means how much interest you will pay back each year. Usually, the amount that the lenders advertise is a "representative" amount which means that you might not always be quoted the figure that is advertised when you apply. Make sure you check this with the organisation you are dealing with before you agree to accept any offers.

Things to remember before applying

  • Lenders will often charge arrangement fees which will be additional to the amount you wish to borrow. Remember to check how much this will be. Be aware that variable interest rates can go up as well as down, meaning your monthly payments may become more than you can afford if you aren't careful.
  • You may also want to check your credit score before you start any application. You can do this for free by using companies such as Equifax, Experian and Noddle.
  • Be aware of PPI or payment protection insurance, it can be expensive and a number of organisations have provided inadequate plans that do not offer any real security against loss of earnings due to sickness or accidents.

How to search for a personal loan

There are a wide range of sites that allow you to compare deals and interest rates before you approach a loan provider. This is the simplest option and can be much quicker than contacting a number of different lenders individually. You could also use specific search terms that reflect your own needs. A search for "bad credit long term personal loan" will provide a hundreds of pages of results, but if you are more specific and use something like "bad credit long term personal loans no fees" you are more likely to find something that is suited to your needs. Sometimes companies will offer special rates for customers that speak to them in branch or over the phone. If you need an instant cash long term loan, or want to get a lower long term loan rate, you could think about approaching highstreet lenders directly.

How to get the best personal loan for you

If you have decided that your best borrowing option is to get a personal loan, you need to make sure that you get the best offer you can. It can be tempting to rush into borrowing, especially if you are in a hurry to get some money into your bank account, but it is always better to take a considered and careful approach. Use sites like those listed above to check who can offer you the best value for money. You could also check with your existing bank to see if they have any special offers for customers who already have a current or savings account. If you have bad credit and need a long term personal loan, you may need to accept a much higher interest rate meaning your monthly payments will be higher. Do be careful, though; your bank may not always be the best option, so make sure you do some research before speaking to them. Many lenders will provide you with a quote before you apply. This means you can find out how much you will be paying before you commit to anything long term. Quotation searches do not effect your credit rating, but denied applications do, so it makes sense to take advantage of this service if it is offered. Finally, if you have a good or very good credit rating, you could think about using a peer to peer loan as an alternative to one of the high street or online lenders. This will not be an option for everybody, however, this type of borrowing option can work out a lot cheaper in the long run.

What if I change my mind?

Borrowing a large amount of money is a decision that you need to be comfortable with making. Never enter into any kind of financial agreement if you are not totally satisfied with the terms and conditions, interest rates and arrangement fees the lender has outlined for you. If you do decide that you no longer wish to go through with a personal loan, all lenders are required to offer what is known as a 14 day cooling off period, by law. This means that for up to two weeks after you have agreed to take the loan, you will be allowed to change your mind, providing you notify the lender immediately.

Who are the best personal loan providers?

This all depends on your credit score, how much you need to borrow and how long you intend to take when paying back your loan. Use a price comparison site to check which lender is the best match to avoid paying too much. If you have a poor credit score, you can use company's such as Wonga, Quick Quid or other payday loan providers. These companies often provide loans without a guarantor check or a credit check, but they are also significantly more expensive than other lenders such as banks or supermarkets. There is a list of some of the most commonly used loan providers and an example of one of their products below. Remember to check with the loan provider as these rates may be subject to change.

These amounts are based on a person borrowing £5000 over a period of five years.

Loan Provider Product Name APR Total Repayments Monthly Repayments
TSB Fix and Flex Personal Loan 3.50% £5450.40 £90.84
ZOPA Zopa Personal Loan 3.60% £5463.00 £91.05
Hitachi Personal Finance Hitachi Personal Loan Exclusive 3.60% £5463.00 £91.05
M & S Bank M & S Bank Personal Loan 3.60% £5463.00 £91.05
Rate Setter Rate Setter Personal Loan 3.70% £5476.20 £91.27
Ikano Bank Ikano Bank Personal Loan 3.70% £5476.20 £91.27
Tesco Bank Tesco Bank Personal Loan for Clubcard Customers 3.80% £5489.40 £91.49
AA AA Personal Loan 3.80% £5489.40 £91.49
Sainsbury's Bank Sainsbury's Bank Small Loan 3.80% £5489.40 £91.49
Tesco Bank Tesco Bank Personal Loan for Non Clubcard Customers 3.90% £5502.00 £91.70

Final Thoughts

Whether you need to borrow money to upgrade old fashioned household items like TVs and microwaves or to pay for a new car or dream holiday, long term personal loans are a relatively simple option that can allow you to get cash into your bank account quickly. As long as you remember to follow this guide and check that you are getting the best deal you can, this option can be simpler and easier to keep track of than credit cards or overdrafts. Short term loans can be useful if you can afford the repayments, but do remember, this option can be expensive. If you ensure that you spend some time researching the different providers of and types of loan that may be available to you, there is no reason that you can't make an informed decision that benefits you in the long term. Always remember to check the APR and additional charges with the lender themselves and make sure you take advantage of that 14 day cooling off period if you need to. Most of all, it's essential to make sure that you can afford to make the repayments and still afford to pay for other essentials such as groceries, utility bills and rent or mortgage payments.

Learn more about the do's and dont's when applying for a personal loan

This website or its third party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy.  By tapping on "I accept" you agree to the use of cookies.  I accept