Personal loans: costs and risks

A personal loan is a lump sum that you can borrow from your bank (or other lender) and then repay in instalments over a set period of time. This type of loan is also known as an unsecured loan, because the money you borrow is not secured against an asset – like your house or car.

You can take a personal loan out for almost any reason. You might want to buy a new car, or pay for your wedding, or cover upfront school fees. You may even want to pay off your credit card debt or improve your credit score.

See some of the things to be aware of and potential costs of taking out a personal loan.

Here are some of the key elements of a personal loan.

• You will receive the money as soon as your application has been approved
  
• You can usually borrow more than on a credit card. Personal loans can usually be between £1,000 to £25,000
  
• You can get a fixed or variable interest rate
  
• Loan repayments are usually fixed and monthly. This can help with budgeting
  
• You can spread your repayments over one to eight years. Remember, the longer you take to pay back your loan, the more interest you will have to pay
  
• You can consolidate existing loans into one personal loan, so you only have one set of repayments. Although this may extend the repayment period, which will increase the repayment amount
  

Here are some of the key things to consider before taking out a personal loan.

• The minimum personal loan amount is usually £1,000
  
• Personal loans might have higher interest rates compared to other loan types
  
• The interest rate advertised isn’t necessarily the one you’ll receive, as this will be based on your loan term and also your credit history
  
• Any time you take on debt there is an element of risk. Will you be able to meet your repayments? And, if your financial situation was to change would you still be able to comfortably meet your repayments?
  
• If you miss repayments or default on your personal loan it may impact your credit score which can impact your ability to borrow in the future
  

Arrangement fee – this is an administration fee that is charged by some lenders for arranging your personal loan.

Late repayment fees – if you miss a repayment under your loan agreement, you may be charged interest on the overdue amount, as well as any administration fees from the lender.

Early repayment charge – some lenders may charge a fee if you pay back more than your fixed monthly repayment amount.

When you take out a personal loan, you must factor in the total loan costs – the amount borrowed plus interest accrued over the repayment period.

Your loan agreement will detail how much you have to pay back and when. This is usually a fixed minimum fee per month.

The amount you can borrow on a personal loan depends on your credit score. The better your credit score, the more chance you have of being approved for a loan and receiving a lower interest rate.

Use our personal loan calculator to see what the monthly repayments could be on your loan.