Now it's personal: basic guide to loans

How to borrow using secured, unsecured and payday loans

1. Personal loans are used by people who want to borrow money without having to use their house as a guarantee.

2. They are called ‘unsecured’ loans precisely because you aren’t putting up your property as security if you can’t repay the loan. So their interest rates tend to be more expensive than those on secured loans such as mortgages.

3. Personal loans are offered by banks – including the supermarkets’ banks – and financing firms (such as car companies). You can usually get up to about £50,000. If you need more, you will need to secure it against your house as a second mortgage or a homeowner loan. Your home is then at risk of being taken by the creditor if you cannot repay the loan.

4. With unsecured loans, you borrow the money then repay it in regular instalments. As long as you keep up with the schedule, you will have repaid the whole loan when the loan term ends.

5. Rates on personal loans are fixed – so you know how much repayments will be over the term of the loan. As at August 2017 the best rates on personal loans were around 2.8%.

6. The rate you’ll get isn’t necessarily the one the lender advertises. It will depend on your credit rating. It’s a good idea to check your credit rating because any mistakes will affect your record. The main credit reference agencies are Experian, Equifax and CallCredit.

7. You don’t need to go to your bank for a personal loan: check comparison websites for the best deals. Be careful not to make too many applications. Each credit company will search your record and may leave a ‘footprint’. Too many footprints in a short period of time might suggest fraud to companies you approach for credit - and thus may affect your credit rating.

8. Why have a personal loan if you can get an interest-free credit card? As long as you are disciplined and DON’T spend any new money on the card, you can use a 0% balance transfer card. You will pay for transferring money over. Make sure you set up a direct debit to pay at least the minimum each month and ensure you’ve paid off the full amount by the end of the 0% period.

9. If you have a poor credit record, you’re unlikely to get a 0% credit card or the better personal loan rates. There are loans and credit cards for those with blemished records but the rates are high. However, if you have one of these cards or loans and keep up repayments, it will help repair your credit record for the future.

10. Payday loans are another way to borrow money if you are running short. But don’t unless you have no alternative: the interest rates are high – more than 1,000% APR on some. Repay as quickly as possible or your debt will start to climb quickly.

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Last updated 22 August 2017