The basics of borrowing with personal loans explained.
An unsecured personal loan can provide an accessible and affordable way of borrowing whether you need to buy a new car or plan to take the holiday of a lifetime. They provide a flexible means of borrowing anything between £1,000 and £25,000 over a loan period ranging from one to five years. This means that you are able to tailor the amount you borrow, the loan period you borrow over and consequently the monthly repayments to your income.
There are a wide range of unsecured loan providers on the market, each with different lending criteria and offering a different interest rate. The rate charged on your loan will depend on the amount you borrow (with larger amounts attracting a lower rate of interest) and on your personal circumstances. Only those with a good credit history are likely to be eligible for the headline rate offered by an unsecured loan provider. This is because unsecured loans are a riskier investment for loan providers as there is no security in place from which they can reclaim their funds if repayments are not met. Those with a very poor credit history who have been refused unsecured borrowing may find that a secured loan may be more suitable.
There are two main categories of unsecured loans. Fixed personal loans are the most common variety as the loan amount and total interest payable is divided evenly over the loan term. This is a practical option as it enables you to plan realistically how much you can afford to pay back each month and borrow accordingly. The interest rate is also fixed for the term so whether standard interest rates decrease or increase your monthly repayments will remain the same.
When comparing fixed unsecured loans it is advisable to use the repayment calculator supplied by each loan provider to work out the likely monthly repayments for the amount you want to borrow. You should bear in mind that these are only estimates based on the companies typical APR and your repayments may be slightly higher depending on the interest rate offered. You should also compare fixed loan plans on whether they offer any repayment holidays during the term of the loan and additionally whether they impose any charges for early repayment.
Flexible loans are not as common and are offered by fewer unsecured loan providers. They may enable you to specify a maximum borrowing amount but do not require you to take all of the funds at once, instead you only withdraw the amount that you need and then pay interest on this amount. For this reason these types of loans are popular with those completing long term, variable projects such as building work. Loans of this nature also allow flexibility in repayments often stipulating a minimum amount to be paid each month but accepting greater repayments without charge.
Most unsecured loan providers offer optional payment protection insurance with their loans as this type of insurance is designed to meet the loan repayments on your behalf if you are unable to due to sickness or unemployment. This comes at an additional cost but can be worthwhile if only to provide you with peace of mind, especially when borrowing larger amounts.
By comparing the monthly repayments, additional features and charges offered by different unsecured loan providers you should be able to borrow the amount you require and repay it over a period of your choice in repayments that fit with your lifestyle.
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