Personal loans (or unsecured loans) is a method of borrowing money from a bank or building society, which you can use for any legal purpose (even though most lenders stipulate that the loan should not be used for commercial purposes). You choose the amount you wish to borrow and the period of time you want to repay the loan over, and the rate will be set accordingly. You then make regular monthly repayments to pay back the full amount of capital plus interest.
As each repayment includes an element of both the capital and interest, you are assured to repay the loan at the end of the term, provided that you make all the payments on time.
Different loan types
Unsecured personal loans are usually available for between £1,000 and £25,000 over the terms of one to seven years. You are not required to put your house or other property up as security.
Secured loans work the same way, but are secured with your property, so you run the risk of having your home repossessed if you do not make the repayments.
Specific loan types, like home improvement loans and car loans, are just unsecured personal loans that go by another name.
How lenders make their money
Loan providers earn money in three ways:
- Interest – You are required to pay a rate of interest on the loan which represents the lender’s profit on the loan itself.
- Fees –set-up or arrangement fees are charged by some loans. If you want to repay the loan early, you may be charged an early repayment fee, and if you miss a payment, you can expect a missed payment fee to be charged.
- Associated products – other products may be offered by lenders, such as payment protection insurance generates an income for them.
How much do you need to borrow? Choose how much money you really need to borrow and the term of the loan. The primary rule is to borrow as little as possible and pay it off in the shortest amount of time.