Personal Loans: Key Factors to Consider

As with any financial product, there are basics that you must consider to make sure that you are getting the right unsecured personal loan.

Our step-by-step guide will assist you in considering all the options that are open to you.

Secured or unsecured?

  • Personal loans or also known as unsecured loans usually allow you to borrow a maximum of £25,000. Some will now let you borrow more.
  • Unsecured personal loans do not have as much risk to the borrower as a second charge mortgage (or secured loan). However, if you default on your repayments, it will have an effect on your credit rating, and you will find it difficult, and definitely expensive, to get credit in the future.
  • If you are looking to borrow over £25,000, most lenders will require security such as property, which means that you will have to go for a secured loan which is also known as a second charge mortgage. These will need a property as security, so if you do not have a property or if your property has no equity, you are restricted to an unsecured loan only. Secured loans are only available to those with an existing mortgage.
  • Beware! If you go default on your secured loan repayments, the lender can file for a repossession of your home, so banks will get their money back one way or the other.

Are you getting the best loan rate?

  • Interest rates for personal loans are priced in advertising and on your credit agreement as an Annual Percentage Rate (APR). All lenders should determine the APR based on the same calculation so you can be able to compare the cost of the loan.
  • Lenders will have various APRs for different tiers of borrowing. However, their lowest rates will tend to be for mid-range or higher borrowing amounts.
  • Adverts for credit, which includes personal loans, have to value a Representative APR, which should apply to at least 51 percent of people who apply as a result of the advert. The actual APR that you are offered will depend on your personal circumstances. The more ‘creditworthy’ you are, the lower the rate you will be offered.

Monthly loan repayments

  • Obviously, you will need to ensure that you can satisfy the monthly repayments. Unsecured personal loans are on a fixed rate basis, so you will know what your repayments will be throughout the loan term. Secured loans, on the other hand, tend to be on a variable interest rate, so make sure that you can cope with any changes in the interest rate on both your first and second charge mortgages.

Do I need insurance to cover my loan repayments?

  • Loan payment protection can be an important insurance to have as it can secure your loan repayments if you are unemployed or sick. However, do not buy the PPI that the lender offers you. Compare payment protection products or go to an independent broker who can give you a better product which is best for your needs. Beware! Always understand the small print of the policy before you take out the insurance.

Upfront fees

There may be upfront fees that you will be required pay. Determine whether these are worth paying, because if they result in a lower repayment, they may signify good value. Remember to factor in any interest that you would have earned on the money if it was in your bank account instead.