Loan terms
Some lenders will give you a loan for as short a period as six
months, although a year is more common. The maximum length is
usually seven years, although some firms will lend over 10.
Personal loans make most sense for people who want to
repay their debt over a few years. If you want to
pay off a purchase over six months, buying it on
a credit card may work out cheaper..
Providers
Banks, building societies and, increasingly, supermarket chains
offer personal loans at competitive rates.
Avoid loans from small firms that you have never heard of
because this is a lightly regulated area. Some
non-mainstream companies charge very high rates
of interest, as well as hefty redemption
penalties if you want to switch to another lender before
the end of the loan term.
Reputable firms generally charge penalties of no more than two
months' interest if you want to pay off the loan early. Shop around
among the banks for the best rates using our Compare tool.
Alternatively, if you have plenty of equity in your property, it
may be cheaper to raise money by increasing the size
of your mortgage.
Interest
Rates are generally fixed for the duration of the loan, which
means you know exactly how much you have torepay each month. The
disadvantage is that you could end up paying more than borrowers
who take out a similar loan in six months' time, if interest rates
fall. If interest rates rise, you will be better off.
Either way, you do not have to worry about your repayments
soaring. Many lenders will insist that you set up a direct debit
for the repayments.
As a rule of thumb, the larger loan, the lower the interest
rate, and vice versa. The crucial rate to look for is the annual
percentage rate or APR.
Tiered interest rates based on size of loan means it may be
worthwhile borrowing slightly more than you had originally planned
if this means moving into a higher band, with a lower interest
rate.
Lenders are increasingly setting ‘personalised’ loan rates,
based on your creditworthiness, so you may not be able to obtain
the 'typical' rates you see advertised. This also makes
comparing rates more difficult as you need to get an individual
quote from each lender.
Credit checks
Lenders want to make sure that you are a good credit risk and do
not have a history of bad debts and unpaid loans behind you. To do
this, they will check with credit reference agencies, such as
Equifax and Experian.
A poor credit record won't necessarily prevent you from getting
a loan, but you will probably have to pay a higher interest rate.
You may find it harder to get a loan if you are self-employed or
are on a short-term contract.
Most personal loans are ‘unsecured’ meaning that the lender does
not require you to put up your home as collateral. If you fail to
repay the loan, your lender cannot usually repossess your home and
this is why the interest rate may be higher than for a
mortgage.
Payment protection insurance
Loan protection insurance, or payment protection insurance,
is often offered with personal loans, with some lenders giving
quotes for personal loans with PPI automatically
included. If applying online, you will often have to tick a box to
opt out of PPI, so be sure to do this if you don’t want it.
PPI covers your loan if you are unable to meet the repayments
because of accident, sickness or unemployment, but think carefully
whether you really need this cover or not.
It is often expensive, only lasts for around a year, there are
numerous exclusions and you won’t normally be eligible for a payout
if you are self employed, unemployed or a temporary worker.
In any case, check what cover you have through your employer in
the event of long term sickness. Most employers will cover you for
at least three to six months, or even up to a year.