Personal loans

What is a personal loan?

When you get a personal loan from a company, you borrow a specific amount of money for an agreed period of time. Each month you’ll pay back a set amount, as well as any interest.

Personal loans are also known as unsecured loans, because you don’t need to secure the loan against something valuable, like your house. Using your home as security means you could lose it if you can’t keep up with repayments.

The interest rate on a personal loan is usually fixed, meaning it won’t change while you’re still paying back the loan.

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What can I use a personal loan for?

Typically, you can use a personal loan for just about anything, and you don’t have to specify what you want to use the money for. However, it’s always wise to check the terms of a loan before you apply. Personal loans are commonly used for large, one-off purchases like:

Of course, you can’t use a personal loan for anything illegal, and it’s not a good idea to use it for anything with high risks, such as gambling.

Consolidating debt with a loan

A personal loan can be one way to consolidate your debts. This means moving debt from multiple accounts (such as other loans and credit cards) to just one account. Consolidating your debt with a personal loan can help you simplify repayments, by combining them into one fixed monthly payment. What’s more, a personal loan may offer you a better interest rate than your existing accounts.

There are other ways to consolidate your debt, such as a 0% balance transfer card. This allows you to transfer your credit card debts to one card, and pay no interest on them for a set period. However, you may have to pay an initial fee to do the balance transfer, and you’ll need to pay off the card before the 0% rate period ends, or you’ll be put on the standard interest rate.

What’s a good interest rate on a personal loan?

How is interest charged?

Interest is calculated as a percentage of the total amount you owe. It’s usually charged on a monthly basis, which means that the longer you have a loan for, the more interest you’ll pay overall. However, paying off your loan over a shorter amount of time means larger monthly payments. So, it’s important to balance out what you can afford each month with how much interest you’re willing to pay overall.

For example, say you borrowed £10,000 at an interest rate of 5% over ten years. You’ll make monthly payments of £105.52, and pay a total of £2,662.82 interest over the entire term.

Now let’s say you have the same loan, except it’s for five years rather than ten. You’ll make larger monthly repayments of £188.20, but you’ll pay a smaller total of £1,292.24 interest overall.

Loan term 10 years 5 years
Amount borrowed £10,000 £10,000
Interest rate 5% 5%
Monthly payment £105.52 £188.20
Total interest paid £2,662.82 £1,292.24
Total amount paid £12,662.82 £11,292.24

Note that when you compare loans, it’s useful to look at their APR. This is the interest rate plus any additional fees for taking out the loan.

You can compare loans with Experian. It’s free and it won’t affect your credit score. Just remember, we’re a credit broker, not a lender – that means we don’t provide credit, but we can help you find credit offers.

What are tiered interest rates for loans?

The interest rate on a personal loan may vary depending on how much you want to borrow. This is called a tiered interest rate system – for example, a company may charge a 7% interest rate for loans between £1,000 and £10,000, and a 5% interest rate for loans above £10,000. Typically, you’ll be charged a higher interest rate for smaller loan amounts.

What interest rate can I get?

The interest rate you’re offered can also depend on how well you fit the lender’s criteria. You can get an idea of how lenders may see you by checking your free Experian Credit Score. This is a number between 0-999. The higher it is, the better your chances of being approved for lower rates.

Can I get approved for a personal loan?

To get approved for a personal loan, you’ll need to show the lender that you’re likely to repay them. The company will assess this likelihood by calculating your credit score, usually using:

  • Your application details
  • Information from your credit report
  • Any data they already hold on you (e.g. if you’ve been a customer before)

Each company has their own criteria for acceptance, but unfortunately they won’t tell you what their criteria are. This means that people have often had to apply for a personal loan just to see if they are eligible for it. This can be problematic, since every credit application creates a hard search on your report – this can lower your score and reduce your chances of approval.

Luckily, you can check your eligibility rating for personal loans when you compare loans with Experian – and it won’t affect your score.

Finding a personal loan: what should I consider?

When comparing personal loans, pay attention things like the APR, length of the loan, terms and conditions, and repayment schedules.

Although larger loans may have lower interest rates, you should avoid borrowing more than you need – overborrowing could lead to financial difficulties or have a negative impact on your score. You should also ensure you can comfortably meet the monthly repayments on time and in full, both now and in the future.

Try and get your Experian Credit Score in shape too, as this can help you get approved for larger amounts and at better rates. There are several steps that may help you improve your credit score before applying for a personal loan.

How should I manage my personal loan?

A well-managed personal loan may improve your credit score, while a badly managed loan can reduce it. Here are our top four tips for managing your loan and protecting your score:

  1. Stick to your repayment schedule to avoid penalty fees and negative marks on your credit report
  2. Keep a monthly budget so you’ve always got enough money for your repayments
  3. If you think you can’t avoid missing a payment, talk to the company as soon as possible to discuss your options
  4. Try not to apply for more credit while you’re repaying your loan, as this might put too much pressure on your finances, and it could lower your score
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