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Personal Loan

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An Unsecured Personal Loan

Unsecured loans or personal loans don't involve borrowing against an asset such as a house.

Usually people will take out a personal loan to repay all of their other debts so that they benefit from one repayment that is hopefully less than what they were paying.

Personal loans can also have reduced interest compared to credit cards or other high interest loans.

  • Debt consolidationOne monthly payment
  • Hopefully a lower paymentCredit cards can be expensive
  • Reduced Interest & chargesCompared to credit cards or payday loans

How does a personal loan work?

Personal loans can be a great way of getting finances under control. If you are able to get a loan it may reduce your debt repayments and you may benefit from just one repayment every month.
Consolidate Your Debts
With a loan you make just one monthly repayment. If you use the loan to repay all or most of your other debts then it will be far easier to organise your finances.
A Fixed repayment period
If you are making minimum repayments on credit cards then you may find yourself in a situation where your debt is almost never ending. With a loan you will have a fixed repayment period to work towards.
Reduced interest and charges
For many people dealing with credit cards, the interest will be significantly higher than a loan. Paying a loan rather than credit cards will greatly reduce the amount of time spent repaying debt.
Pay less every month
With a loan you can repay over a period of up to typically 5 years. With reduced interest compared to credit cards, you will probably find that you are repaying less every month towards your debt.

Example of a Personal loan:

Personal loans vary in loan amount, interest and charges, monthly repayments. Below is an example of how a Personal Loan could help to make multiple debts, more manageable.

Before a Personal Loan:

Total debt & interest to repay: £31,258
100%
Number of monthly payments: 5 Credit cards
100%
Monthly Repayments: £500
100%
Average Interest rate: 26%
100%

After a Personal Loan:

Total debt & interest to repay: £24,024
76%
Number of monthly payments: 1 Loan
20%
Monthly Repayments: £400
80%
Average Interest rate: 12%
46%

The downsides of a personal loan

Loans are not always the answer. There are downsides to using debt to deal with debt and a commitment to a loan needs careful consideration.
Not Everyone Qualifies
If you have a poor credit rating or indeed you already have a heavy debt burden then lenders may see you as a risk and won't lend to you.
Need to consolidate the debt
It's important that when taking out a consolidation loan, you actually consolidate all or most of the debt. If you take out a loan and still have other debts to deal with then you are increasing pressure on your finances.
Make sure it's affordable
Sometimes a new loan can cost you as much as your currently monthly debt repayments. If you are finding debt unaffordable then you need to think about the underlying cause and if a new loan will really help.
1 Creditor can restrict your options
Many of the non borrowing debt solutions may not work if you only have one creditor such as a consolidation loan. If you start missing payments to a loan and need help then your options on dealing with the loan may be limited.
You can only borrow up to £25,000
With personal loans, you may borrow a maximum of £25,000. If your current debt is over £25,000 then you may not be able to consolidate what you need to and a loan could do more harm than good.
Only 5 year loan terms
Personal Loans can only be taken out over a period of 5 years. That could mean that the loan repayments are unaffordable for you. For example, borrow £25,000 and your monthly payment is likely to be at the very least £520. (This assumes a APR of 9%)
Money Advice Service

To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.

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