Personal Loans

What are they:

Personal loans are lump sums from banks, building societies and loan companies. They are usually taken out for personal, family or household reasons and the borrower is then committed to make repayments, typically on a monthly basis. Personal loan durations can be anything from 6 months to 10 years and are usually for sums in the region of £500 to £15,000.

When interest rates are low personal loans can be a very attractive way of borrowing money. For example, if you intend buying a new car a personal loan could well cost you less than the car dealership finance you often get offered.

Personal loans normally have a lower interest rate than say credit cards and store cards, for example, so they are a good way of clearing outstanding finance and rolling payments into one monthly manageable amount. This is often referred to as debt consolidation, and gives the borrower the opportunity to manage their monthly outgoings more efficiently.

Loan Options

There are two main types of loan. There is the secured loan and the unsecured loan. Secured loans are things such as mortgages which are linked to your property or assets. The downside to these is that your property is then at risk if you do not keep up your repayments. Secured loans pose much less of a risk to the lender though, and this enables them to offer these loans at much cheaper rates. They are probably the cheapest of all types of borrowing.

Unsecured loans are not tied to any of the borrowers assets or property so the risks to the lender are greater, therefore repayments and APR on this type of loan are that much higher. Rates for unsecured loans can vary from anywhere between 8% and 20%, so its advisable to do some shopping around and get the lowest repayment rates. The amount given in an unsecured personal loan is usually dependent on your income, your credit history and any outstanding debts you may already have at the time of borrowing.

According to Marks and Spencer Financial Services the top 10 Personal Loans and average sums are:

Home improvement £3605

Car or car repairs £3369

Holiday £2252

Wedding £4190

Caravan £5466

Electrical goods £2352

Motorbike £2844

Medical expenses £5063

School fees £3838

Garden £2885

Top Tips For Loans

Only ever borrow what you can afford. You can do this by working out how much disposable income you have left per month after all outgoings are accounted for, but don't be tempted to allocate all this spare cash to a loan repayment.

Pay particular attention to the APR of a loan. APR stands for Annual percentage rate and is basically how much the loan will cost you. APR takes into account the interest and any other charges attached to the loan and expresses it as a percentage of the loan amount.

If you are comparing APR rates across several lenders then do ensure you use comparable data. Some APR percentages might be quoted monthly while others are yearly.

You will get a better APR if you borrow a higher amount. You will also get a more favourable APR for a longer term loan, but in the long run the cost to you in interest will likely be more. It's always advisable to take loans for the shortest term you can manage and pay them off as quickly as possible.

Personal loans sometimes come with the offer of security. These can cover you for non payments during unforeseen circumstances such as periods of unemployment, for example. Do check the small print, though, as many have stipulations and conditions attached to these security options. Also, you might often find that these security options come as standard, so do ask the lender if this is the case before buying.