Personal loans

Personal Loans: The Basics | evening standard

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Personal loans can be an affordable way to raise funds for all kinds of expenses. Uses for an unsecured loan can include financing a new car, home renovations, or even a one-time wedding or vacation.

Sometimes a loan can be the answer to consolidating expensive credit card balances and can save you money in the long run.

A personal loan can be a cost-effective solution because low interest rates mean borrowing is relatively inexpensive. Although loans are readily available on the high street and online, taking out one means signing a legal contract, so it’s important to make sure you understand exactly what you’re getting into.

How does a personal loan work?

You can borrow between £1,000 and between £25,000 and £30,000 through a personal loan, and sometimes more if you’re already a bank customer.

However, interest rates, which are expressed as annual percentage rates (APR), are tiered based on the amount you borrow. Typically, rates are much higher on loans below £7,500, so for much smaller amounts it might make sense to weigh other types of borrowing such as 0% credit cards or the discovery.

Although it may seem counter-intuitive, if you opt for a loan, it may even be cheaper to borrow a little more than expected.

For example, if you want to borrow £7,400, a loan of £7,500 (the threshold where the lowest APRs on loans kick in) might make borrowing cheaper overall. But do your math first, using an online calculator, to be sure.

At the other end of the scale, if you want to borrow more than the maximum offered by a personal loan, you will need to post collateral, such as your home, and take out a secured loan instead. This is not a decision to be taken lightly as it means your home is in danger. It’s also not an option for everyone – tenants for example.

You can choose how long you want to take to repay a personal loan. Most loans range from 12 months to seven years with a fixed rate, so you know exactly what you’re paying each month. Always check though, as some loans may be offered at a variable interest rate that can go up and down.

Generally, the longer the loan term you choose, the lower the monthly payments will be, but the more interest you will pay overall.

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What do lenders charge?

APRs representative of the cheapest personal loans are currently under 3%. But the offers vary over time depending on the market. Advertised APRs are also “representative,” meaning they should only be offered to 51% of accepted applicants.

When you apply for a loan, lenders will assess your creditworthiness by checking your credit history, which will highlight any missed or late payments.

These defects will most likely have an impact on the interest rate offered to you if your application is accepted. It is therefore possible that you will not obtain the advertised interest rate. If you have a history of late or missed payments, you will likely be offered a higher APR.

Your credit rating will affect loan application approval and the final interest rate offered. Once you have completed the application process, you will receive confirmation of the rate you will be charged.

Importance of shopping

Taking the time to think about the best loan for you and comparing credit offers could save you a substantial amount of money. Don’t just go to your bank, for example, because they are unlikely to offer the lowest rate on the market.

Use a comparison site to ensure you find the cheapest rates on the market and from a provider you trust.

Do not make a handful of applications with the aim of choosing the cheapest offer. By making multiple applications, you risk damaging your credit score and being forced to pay a higher rate, or even being denied credit entirely.

This is because if a lender can see that you’ve applied for a lot of loans, they may assume that you desperately need the money, which discourages them from offering you a loan.

However, if you use an eligibility checker, it will perform a “simplified search” instead. This means you can see how likely you are to be accepted for a personal loan before you apply and won’t leave a mark on your credit report.

Once you have found an affordable loan, you can apply online and the money can sometimes land in your designated bank account on the same day. It all depends on the lender and how quickly your application can be processed.

Change of circumstances

As part of the loan agreement, you agree to make the monthly repayments indicated for the term of the loan. If it looks like it’s about to get tough, it’s important to talk to your lender before you run out.

Defaulting on a loan affects your credit score, whether you miss one or more payments. A missed payment will be flagged on your credit report, which means other lenders will see that you failed to keep up with a loan. This will reduce your chances of being approved for credit cards and loans in the future, as well as rental contracts or even a cell phone contract.

However, if a missed payment is agreed upon with your loan provider – such as a pre-approved payment holiday – it won’t create a stain on your credit profile.

Whatever your situation, don’t put your head in the sand. Lenders may agree to restructure the loan, take smaller payments for a while, or offer a complete break from payments until you get back on your feet.

Scam alert

If you decide a personal loan is for you, be on your guard. There is a growing scam involving personal loans that could waste a lot of your time.

Fraudsters contact you out of the blue and offer you a loan. The sting in the tail is that they ask you to pay an advance to release the funds. You will likely be told that the fee is refundable and will serve as a deposit or administrative fee to secure the money. It may be as little as a few pounds, although in some cases the scammers have demanded a series of fees, totaling hundreds of pounds.

Not only will scammers walk away with your money, but they will also regularly steal your card details used to make the payment. There is of course, no loan at the end of it.

A genuine loan offer will never require payment to activate the loan and if you take out a loan from an unauthorized company you will not be covered by the Financial Ombudsman Service if things go wrong.

Compare personal loans from the best lenders

Check your eligibility for a range of loans, without affecting your credit score.

Compare loans