Personal loans can offer the opportunity to borrow more money than would be available using a credit card, sometimes as much as £25,000. Interest rates are also usually lower than they would be with a credit card, although they do vary.
Also known as unsecured loans, personal loans are not fixed to an asset, such as your home or your car, like a secured loan.
There are two main loan types – fixed rate loans and variable rate loans. If you choose a fixed rate loan, the rate of interest you pay will stay the same over the period of the loan. This can make it easier to budget. If you choose a variable rate loan, the interest rate may fluctuate. So, your repayments could increase or decrease.
You can choose how long you’d like to take to repay the loan. In some cases, you can make overpayments or repay the loan in full before the end of the agreement without penalty. If this is something you'll want to do, make sure you check this is available on any loans you look at.
Personal loans can be useful when you want to borrow a relatively large amount, and would like more time to pay it back. A credit card might be better for short-term borrowing.
You might consider a personal loan to spread the cost of a big purchase like:
Personal loans can also be used to consolidate existing debts into one monthly repayment. This can be convenient in terms of having only one monthly payment to deal with, but bear in mind that extending your debt could mean you end up paying more interest.
Each loan is advertised with a representative Annual Percentage Rate (APR), which you can use to quickly compare loans. This includes the interest rate, as well as any arrangement and other standard fees.
Remember, the representative APR advertised isn’t necessarily the interest rate you’ll get. The interest rate you get will depend on your personal financial circumstances, including your credit history.
Other things could be important to you when choosing a personal loan, such as how quickly you receive the money into your account, or the flexibility to make overpayments.
When you apply for a personal loan, you’ll need to have a good understanding of the costs you need to meet. For example, if it’s a dream kitchen it will be helpful if you’ve priced up the materials and work involved and have a budget for the entire project.
Once you’ve figured out how much you need, it’s time to look at how much you can afford to pay back each month. Taking the loan out over a longer period may reduce your monthly repayments, but you may pay more in interest over the full term of the loan. Use a loan calculator to look at different scenarios and decide how much is right for you.
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