What is a personal loan?
When you need to borrow a fixed sum of money over a fixed amount of time, that’s known as a personal loan. They are mostly fixed at a set rate of interest and are the main type of lending performed by the banks and building societies alongside mortgages. Mortgages are similar except they are secured against an asset, in this case a house or a boat.
Most personal loans are also unsecured loans which means that you are personally responsible for the debt, it’s not secured against something with a high value like a car or home.
How much can you borrow?
Personal loans can often be much larger than short term loans, which are a type of loan for emergency borrowing for unexpected expenses like boiler repair or a reduction in salary. Because they’re larger they also frequently take longer to repay. It’s not uncommon for personal loans to be spread over 5 years or longer.
The actual cost and length of the loan will depend a lot on your personal circumstance, how much you earn and how much disposable income you have. Disposable income is the money left from your salary after all of your bills and living expenses are taken care of.
For larger loans with values of around £25,000 or more, your lender will probably want to secure the loan against something valuable. That could be your home or your car, this way they know they’ll get something back if you stop paying. These are known as secured loans, logbook loans or homeowner loans.
Alternatives to personal loans
Many people use credit cards where a personal loan might be better. Although a credit card can often provide the same level of borrowing, the interest rate will almost always be much higher.
Credit cards are very hard to pay off once you start spending as the minimum payment each month is small. This means it can take years to pay off even a small amount as the payment will barely cover the interest added each month. You need to be very careful to pay more than the minimum payment to pay off the credit card more quickly. With a loan from a reputable lender, that is taken care of and you know exactly when your loan will be paid in full.
There are some situations where a credit card is worth it, especially if you can find a 0% credit card deal. As long as you are paying back quickly and you don’t build up a large balance you should be fine.
What to look for
If you’re new to this type of borrowing, you might be confused where to start. Personal loans are really simple, you choose the amount you need and over how long. The lender will then look at what you can afford and your ability to meet the monthly repayments. They might offer you either a smaller amount or longer term to make the loan affordable.
One important aspect of the loan and one that determines how much you need to repay is your APR. The Annual Percentage Rate is how the lender makes some money. The interest gets added to your loan and the total repayable is the original amount plus the interest. That APR can make a big difference to the amount you pay so watch it carefully.
Here at Simple Personal Loans, we offer a wide range of loans from our lenders and so the APR can be within a wide range. The final amount will depend on your circumstances so you may not know until you complete all of the checks with your lender.