Personal Loans – What to consider

An unsecured personal loan tends to be more straightforward than other forms of finance. As the loan is unsecured, it does not require you to put an asset (such as your home) down as collateral against the loan.

Personal loans are offered by the majority of banks and other lenders, and you can typically expect to borrow between £1,000 and £25,000over a relatively short period of time (in comparison to a secured loan).

Advantages of personal loans

Flexibility – unsecured personal loans offer the flexibility to choose how long you have to repay them, with most borrowers making fixed repayments for between one and five years.

Payment holidays – Some personal loans offer the option of a payment holiday of two to three months at the start of the agreement.

Low cost – Unsecured personal loans can be a cheap and easy way to get your hands on the cash you need depending on your personal circumstances.

Am I eligible for an unsecured personal loan?

As a general rule, whilst you don’t have to be a homeowner to apply, unsecured personal loan lenders will only consider applications from borrowers who have at least fair credit score. Additionally, most lenders will require that:

Sometimes, life throws up unexpected circumstances where you need a short-term influx of cash. You might be making efforts to consolidate debt, make repairs to your house, or plan a wedding. Whichever large purchase you need to make, a personal loan might be the money tool which offers you a solution. 

Key takeaways:

What are personal loans?

Personal loans are a flexible product and can be used for nearly any purpose you could think of. Once your loan request is approved, you will receive an amount in your bank account from the lender in one lump sum. 

The time that it takes to receive the loan can vary between lenders. The arrival of your much-needed funds can take anywhere from 24 hours to a month. Depending on your spending intentions, this is important to remember when selecting a lender if you require the money quickly. In addition, as soon as you’ve received the sum of your loan, you’ll be expected to begin making monthly repayments. You’ll need to factor this into your monthly budget to avoid falling behind.

What type of personal loan could you be offered?

Most personal loans available on the marketplace carry fixed interest rates. In other words, your payment amounts will likely remain the same until you finish paying off your loan. This option makes you aware that industry-wide interest rate increases won’t impact your payments. 

In addition, personal loans are usually unsecured. This means that, unlike secured loans, they carry no collateral. If you have a sufficient credit score, it’s usually possible to get a personal loan of this sort. The fact that, in most cases, no external collateral is tied to a personal loan means that it carries much less risk than alternative types of financing, such as home equity products, for instance. If your credit record is in good shape and you obtain an unsecured loan, your home, car, and savings account will not be at risk in the short term if you default.

Your chances of obtaining an unsecured personal loan are significantly reduced if you have any adverse credit history. If this is you, don’t fear. Those not qualifying for an unsecured personal loan may be offered a secured loan from lenders instead. This means you need to put up some collateral to get your loan request over the line. 

For example, you could use a pre-existent savings account as collateral. If this option does not work for you, ask a third party to co-sign on your loan is possible, like a friend or family member. This can accelerate the approval process and allow you to get the best possible outcome.

While some lenders just want to be sure you can repay the loan, others may ask how you will spend the money they give you. Personal loans can set you back a fair sum, but taking one out could save you money compared to other finance options you may consider, which carry higher interest rates, especially credit cards. 

Could a personal loan be right for you?

Like many products across the marketplace of personal financing, personal loans are highly tailored to whoever is trying to borrow them. Not every situation can be resolved by this type of loan, but it can prove very useful for certain circumstances.

To help you decide whether a personal loan is right for you, we have explored why many people might take one out below and why a personal loan may not always suit your goals.

Boosting your credit score

Building your credit record and score is vital to securing high-stakes financial products in the future, such as mortgages, for example. Prompt repayment of a personal loan can help you improve your credit score. This is especially true if you have a history of missed credit card, Buy Now Pay Later, or car payments. 

In addition, if your credit report highlights that you’ve taken on a lot of credit card debt in the past, adding a personal loan into the mix of products you’ve accessed (and paid back!) might support your case for securing additional loans in the future. Having your credit report reflects the use of different categories of loans, and proving your ability to repay them on time, will help demonstrate your suitability as a candidate to lenders in the future.

With all the above in mind, it is also important to remember that the practice of borrowing money you don’t urgently need to boost your credit score can sometimes be a risky financial move. If you maintain a low ratio of credit use and continue to keep on top of other liabilities you might have, your credit score will improve organically. If you have concerns about your ability to repay the sum of a personal loan alongside your other bills, it is always best to choose another credit route.

Funding improvements to your home

Sometimes, catastrophe strikes, and your washing machine, boiler, or fridge stops working with little-to-no warning. On other occasions, you might need to urgently house an elderly relative in an outhouse which doesn’t exist yet, and you don’t have the funds to cover this renovation.

Whichever circumstances have driven you to investigate personal loans, it is possible that taking one out could be a cheaper option for you than financing any home improvements you may make through the vendor. In many cases, taking out a personal loan instead of a credit card can save you a sizeable sum.

With this being said, looking into using your home to fund these improvements is always worthwhile before taking out a personal loan. If you’ve been paying into your mortgage or are lucky enough to be in a position where you’ve already paid it off, equity will have built up in your home. If you are in this situation, a home equity loan could be even less expensive than a personal loan. 

Whilst this might be the case, it is important to remember that home-equity loans are secured debts, whilst personal loans usually aren’t. By taking out a home equity loan, you’ll be putting your home up for collateral, and this could be seized if you fail to keep up with repayments.

Financing the purchase of a vehicle

Access to a vehicle is an essential part of daily life for many people. Many of us rely on our cars and vans to get to the office, collect our kids, or do freelance labour. There are also circumstances where you might want to purchase a boat or an RV without using the entire contents of your savings account.

A personal loan could help you get back on the road if you unexpectedly need to purchase a new car or van and can also help you make your dream vehicle purchase of a boat or RV without eating up funds which you’ve earmarked for emergencies.

This type of loan is often a cheaper alternative to financing with the company from which you’re buying a vehicle. In addition, it can also be a savvy way to pay for a vehicle if you’re buying from a third party, as opposed to the company that made it.

A personal loan may seem like the ideal financing option for your vehicle purchase. However, it is important to remember that you may be offered a secured personal loan, which would mean that both the vehicle you buy and any collateral you put up may be sequestered if you’re unable to make the loan repayments. This fact will help you make a risk-averse decision on whether you need a personal loan to buy a vehicle.

Moving expenses

Moving house can be an expensive life event. Sometimes, it can also come out of the blue, especially for renters. Taking out a personal loan could be a good option if you’re in a position where you must finance your move and have no cash to hand.

The funds you receive from a personal loan could help you tick off many items on your to-do list when moving house. Things like renting a van, hiring help to move your belongings to their new location, renting a storage unit for a period, or purchasing furniture for your new home can be covered with a personal loan and repaid monthly whilst you settle into your new abode.

In circumstances where you’ve decided to relocate without securing a new offer of employment, a personal loan could also help tide you over whilst you search for a new job. Through using this option, you can – quite literally – buy time to establish yourself in your new location without relying on savings.

While many people could benefit from a personal loan in this situation, creating an accurate budget in line with your new accommodation and living costs is important. Figuring out your new total outgoings once you’ve moved, including your new rent or mortgage rate, utilities, and monthly loan repayment, will help you calculate whether you can pay all your bills simultaneously, avoiding any chance you can default on your loan.

What’s the bottom line?

Personal loans are just that – personal. The cheapest, safest financing option for one individual may not apply to another, as everybody’s financial circumstances differ. A personal loan is a big commitment, and the amount you can borrow depends on your credit history and ability to repay.

This article has explored a few benefits and drawbacks of using a personal loan product. Speaking to lenders to seek advice before applying could put you in the best position to take the next steps.