When it comes to borrowing money, personal loans are a popular option. They can be used for various purposes, such as consolidating debt, financing a home improvement project, or covering an unexpected expense. In this blog post, we will provide a comprehensive guide to personal loans.
We will cover everything from how they work to the different types available. By the end of this guide, you will know everything you need to know about getting a personal loan!
What is a Personal Loan?
A personal loan is a type of loan that can be used for various purposes. Unlike car loans or home loans, which are typically used for a specific purpose, personal loans can be used for anything you want.
The most common use for personal loans is consolidating debt. This means taking out one loan to pay off multiple debts. This can be helpful if you have high-interest debt, such as credit card debt. By consolidating your debt into one loan with a lower interest rate, you can save money on interest and pay off your debt faster.
Another everyday use for personal loans is financing a home improvement project. This might include anything from making repairs to your home to refurbishing your kitchen or bathroom. If you don’t have the cash on hand to pay for these projects, a personal loan can be an excellent way to finance them.
Personal loans can also be used to cover unexpected expenses. This might include anything from medical bills to car repairs. A personal loan can be a good option if you don’t have the money in your savings account to cover these expenses.
How do Personal Loans work?
Now that we’ve covered what personal loans are and some of the most common ways they are used, let’s take a look at how they work.
Personal loans are typically unsecured loans, which means they don’t require collateral, also known as security. This is different from larger car loans or home loans, which usually do require collateral.
Personal loans are also typically fixed-rate loans, which means the interest rate will stay the same for the life of the loan. This is different from variable-rate loans, where the interest rate can change over time.
When you take out a personal loan, you will agree to a loan term, which is the amount of time you have to repay the loan. The most common loan terms are three years, five years, and seven years.
You will also agree to a monthly payment amount, which will be the same each month for the duration of the loan.
What are the main types of Personal loans?
Now that we’ve covered how personal loans work, let’s take a look at the different types available and break them down to understand the difference between them all.
- Unsecured Loan – This is the most common type of personal loan. Unsecured loans don’t require collateral and are typically used for smaller purchases. If you default on an unsecured loan, the lender cannot take your property. The advantage of an unsecured loan is that they have simple application processes and can be arranged quickly. The downside is that it usually has a higher interest rate than a secured loan.
- Secured Loan – Secured loans are typically used for larger purchases, such as a car or a home. The loan is secured by collateral, which means if you default on the loan, the lender can take the collateral to recoup their losses. The advantage of a secured loan is that it usually has a lower interest rate than an unsecured loan. The downside is that if you default on the loan, the lender can repossess your property.
- Fixed Rate Loan – As we mentioned earlier, fixed-rate loans have an interest rate that stays the same for the life of the loan. This makes it easy to budget for your monthly payments because you know they will stay the same. The advantage of a fixed-rate loan is that you know exactly how much your monthly payments will be. The downside is that if interest rates go down, you won’t be able to take advantage of lower borrowing costs.
- Variable Rate Loan – As we mentioned earlier, variable-rate loans have an interest rate that can change over time. This means your monthly payments could go up or down depending on the interest rate. The advantage of a variable-rate loan is that you might be able to get a lower interest rate if rates go down. The downside is that your monthly payments could go up if rates go up.
What are the advantages of a Personal Loan?
Now that we’ve covered the different types of personal loans, let’s take a look at some of the advantages they offer.
- Personal loans can be used for various purposes, including home improvement projects, medical bills, and car repairs.
- Personal loans are typically unsecured, which means they don’t require collateral.
- Personal loans are also typically fixed-rate, which means the interest rate will stay the same for the life of the loan.
- When you take out a personal loan, you will agree to a loan term, which is the amount of time you have to repay the loan. The most common loan terms are between three-seven years.
- You will also agree to a monthly payment amount, which will be the same each month for the duration of the loan.
What are the disadvantages of a Personal Loan?
Of course, personal loans also have some disadvantages that you should be aware of before taking one out. Bear these in mind before you make your decision.
- Personal loans can have high-interest rates, especially if they are unsecured.
- If you default on a personal loan, the lender could take legal action against you. This will include registering defaults, or even CCJs on your credit file, making borrowing more difficult going forward.
- Personal loans can also affect your credit score. This is because when you take out a personal loan, you are borrowing money that you will need to pay back with interest. If you make your payments on time, your credit score will improve. However, your credit score will suffer if you miss a payment or default on the loan.
- Another disadvantage of personal loans is that they aren’t always easy to qualify for. Why? Because personal loans are unsecured, lenders often view them as riskier than secured loans. As a result, you may need to have good credit to qualify.
- If you default on a personal loan, the lender can’t take your property as they could with a secured loan. However, they can still take legal action against you.
How can I qualify for a personal loan?
- Qualifying for a personal loan is not as difficult as you may think. In fact, there are a few things you can do to increase your chances of being approved.
- First, make sure you have a good credit score. A high credit score will show lenders that you’re a responsible borrower and more likely to repay your loan on time.
- Second, try to avoid taking out a loan for more than you need. This will reduce the amount of money you need to borrow and increase your chances of being approved.
- Third, make sure you shop around and compare different lenders before applying. Each lender has different requirements, so it’s important to find one that’s a good fit for you.
- Finally, make sure you read the terms and conditions of the loan before you apply. This will help you understand the loan and avoid any surprises down the road.
How to apply for personal loans
When you’re out of a personal loan, trying to understand the process can feel a little confusing, especially if you’re doing it for the first time. However, while the process can vary slightly from provider to provider, it usually follows a generally similar route.
- First, you’ll need to fill out an application. This will include personal information such as your name, address, and date of birth.
- Next, you’ll need to provide financial information such as your income, debts, and assets.
- Once you’ve submitted your application, the lender will review it and make a decision. If you’re approved, you’ll receive a loan offer with the terms and conditions of the loan.
- Once you’ve accepted the loan offer, the lender will send you the money.
- Finally, you’ll need to make your monthly payments on time to avoid defaulting on the loan.
The very best thing you can do before taking out a loan is to look at the rates and providers that are being offered to you, and then look into the process of that specific provider to ensure it works for you.
Why are personal loans important?
Personal loans can be a great way to finance big purchases or consolidate debt. However, it’s important to understand the terms of your loan before you apply. By doing so, you can avoid any surprises down the road and make sure you’re getting the best deal possible.
These kinds of loans are important to so many people because they provide a way for them to get access to the money they need without having to put up any collateral. This means that anyone can qualify for a personal loan, regardless of their financial situation.
Additionally, personal loans can be used for various purposes, including consolidating debt, financing a big purchase, or even taking a holiday.
An example of when a personal loan would be important is when someone is trying to consolidate their debt. By consolidating their debt, they can save money on interest and get out of debt faster.
How is personal loan interest calculated?
The interest on a personal loan is calculated based on the amount of money you borrow, the length of time you borrow it, and your interest rate.
For example, let’s say you take out a personal loan for £15,000 with an interest rate of 12% and a term of 60 months. Your monthly payment would be £259.90, and the total interest you’d be paying back would be £6,831.21.
Personal loans are taken out on a capital repayment basis, which uses a form of complex interest, meaning that the calculation is very complex. The easiest way to work out your interest charges would be to use an online loan interest calculator.
Are personal loans fixed?
Most personal loans are fixed, which means that your interest rate and monthly payments will stay the same for the duration of your loan. This can make it easier to budget for your loan repayment, as you’ll know exactly how much you need to pay each month. That said, some personal loans have variable interest rates. This means that your interest rate could go up or down over time, depending on the market conditions.
Variable-rate loans can be riskier than fixed-rate loans, as you may end up paying more in interest if market rates rise. However, they can also be beneficial if market rates fall, as you could end up paying less in interest.
In short, the answer is that most personal loans are fixed, but there are some that have variable interest rates if you require this approach.
What is the lowest interest rate on a personal loan?
The lowest interest rate on a personal loan is currently 2.7% per annum. The rate that you pay depends on several factors, including your credit score, income, and the lender you choose.
Generally speaking, the better your credit score is, the lower the interest rate you’ll be offered. This is because lenders see people with good credit scores as being less of a risk and more likely to repay their loans.
Similarly, if you have a high income, you may be able to qualify for a lower interest rate as you’re seen as being more capable of repaying your loan.
Finally, the lender you choose will also play a role in determining the interest rate you’re offered. Some lenders are simply more competitive than others regarding personal loan rates.
Currently, in the UK, at the time of writing, the lowest interest rate on a personal loan is from AA at just 2.7% APR. However, this is only available to people with excellent credit scores. For people with good or average credit scores, the best rates are currently from Sainsbury’s Bank and Barclays, both of which offer rates of around three percent APR. Of course, these rates can change at any time, so it’s always worth shopping around to see what offers are available before you apply for a loan.
It is possible to get a personal loan with bad credit, but it will likely come with a higher interest rate. This is because people with bad credit are seen as being a higher risk by lenders and are therefore offered less favourable terms. Regardless of whether you have bad credit and are looking for a personal loan, it’s important to compare the rates of different lenders to see who’s offering the best deal. You can use online tools to easily do this.
When you’re comparing personal loan rates, it’s important to look at the APR (annual percentage rate). This is because the APR includes both the interest rate and any fees charged by the lender, so it gives you a more accurate idea of how much your loan will cost. For example, let’s say you’re looking at two personal loans with an interest rate of three percent. Loan A has no fees, while loan B has a £100 application fee.
The APR for loan A would be three percent, while the APR for loan B would be slightly higher at three point two percent. This means that, even though both loans have the same interest rate, loan B will actually cost you more in the long run. When you’re comparing personal loan rates, always look at the APR to get an accurate idea of how much your loan will cost.
What is the difference between a personal loan and a credit card?
The main difference between a personal loan and a credit card is the way that they’re structured. A personal loan is a lump sum of money that you borrow from a lender and then pay back over a set period of time, usually at a fixed interest rate. On the other hand, a credit card is more like an ongoing line of credit. You’re given a credit limit by the lender and can spend up to this amount. You then have to make minimum monthly repayments, but you can also choose to pay off your balance in full should you choose to.
Another key difference is that personal loans usually have lower interest rates than credit cards. This is because they’re seen as being less risky for lenders, as you’re required to repay the loan in full within a set period of time.
If you’re thinking about taking out a personal loan, it’s always worth comparing the rates of different lenders to see who’s offering the best deal.
Are personal loans tax exempted?
No, personal loans are not tax exempted. The interest that you pay on your personal loan is not tax-deductible. However, there are some exceptions to this rule. If you use your personal loan for business purposes, then the interest may be tax-deductible. If you’re not sure whether the interest on your personal loan is tax-deductible, it’s always best to speak to an accountant or tax advisor. They’ll be able to give you the most accurate information based on your individual circumstances.