Last updated: 16/10/2020 | Estimated Reading Time: 5 minutes

Personal loans

If you need to borrow money, but don’t want to put up your house or car as security, then you might want to consider taking out a personal loan.

Read this guide to find out what personal loans are, what forms they come in, and whether or one would be right for you.

What are personal loans?

Personal loans, or unsecured loans, are borrowing products that you can take out without needing to put up any assets as security.

Personal loans are very straightforward and can be obtained from a wide variety of different types of creditor, from banks to building societies to dedicated loan companies and even through peer-to-peer schemes.

Unsecured personal loans come in a wide variety of forms, with terms and prices covering a pretty wide range, so it’s important to shop around to make sure that you get the kind of product that you’re after.

Who can get personal loans?

Anyone can take out a personal loan, within reason. The same broad restrictions will apply as do to most other credit based products. That is, you will be means tested according to your income and your credit rating will be examined.

You will also likely be asked about your reasons for taking out a loan, particularly for larger amounts.

If you have a poor credit rating, then all is not lost – there are loans out there designed for people with poor or limited credit histories. You won’t be able to borrow as much as something with a good credit rating though, and you’ll likely be charged particularly high interest rates, so if you do need money and don’t have a good credit rating then a loan probably shouldn’t be your first port of call.

Instead, depending on how much you need to borrow, you could think about first taking out a credit building credit card, allowing you to use relatively small amounts of credit each month, but improving your credit rating as you do so.

If you’re in debt and are struggling with multiple payments to multiple creditors, then you might want to consider a debt consolidation loan, combining all of your debts into one, straightforward payment plan.

How much can I borrow?

Personal loans are one of the most straightforward ways of borrowing money, so long as you don’t need any more than £25,000 – if so, then you’ll need to consider a secured, homeowner loan.

The exact amount that you, personally, will be to take out will depend on things like your credit rating and your general financial situation at the time of applying

Peer to peer lending

Peer to peer lending is a growing industry that allows individuals to lend money to other individuals via dedicated companies, sidestepping banks entirely.

Generally speaking, when borrowing using a peer to peer service, you’ll be able to get slightly better interest rates, given the fact that the operating costs of an online peer to peer lending company are significantly lower than those of a commercial bank.

Peer to peer services also often allow greater flexibility in terms of repayment terms than can be enjoyed when borrowing from larger financial institutions.

Peer to peer lending is also becoming more and more popular with savers as well as borrowers, as interest rates for those acting as creditors are often higher than with traditional savings accounts.

Short term borrowing

If you need cash quickly, whether to make a particular purchase soon or to simply tide you over until payday, then you’ve got a few options available.

Short term borrowing solutions like payday loans tend to be very expensive, with high APRC levels in order to ensure that they get paid off quickly.

However, there are alternatives you could consider like arranging an overdraft with your bank or taking out a credit card.

Flexible loans are available from most banks and building societies and, while they are somewhat harder to get than most conventional loans, they allow you to change the size of your repayments according to your means and so can be a great way to supplement your cash flow in line with your means.

For more information, head over to our comprehensive guide on short term loans.

Personal vs. secured loans

Naturally, the big advantage that personal loans have over secured loans is that you do not have to put your home at risk when you take one out.

When you take out a secured loan or a mortgage, the creditor from whom you are borrowing the money has legal ownership over your house until you pay back the loan. More exactly, they own the portion of the property worth the amount that you have left to repay. The rest (i.e. the portion worth what you have paid off or, if you borrowed less than the property’s value, then that remainder) is known as the equity – this portion you legally own.

The upshot is that if you do use your house as security against a loan, you’ll be able to borrow significantly more money than otherwise – generally speaking you’ll be able to borrow up to around 80-85% of your property’s value, though the exact percentage will, again, depend on your credit rating.

Things to be careful of

As with any kind of financial product, you want to make sure that you’re getting the best deal possible.

As such, you should shop around before settling on one particular loan, and always pay attention to the small print.

Unfortunately, when a deal seems too good to be true, it often is, and so always be discerning – this is particularly the case with payday loans.

However, this doesn’t mean that the perfect loan for you doesn’t exist.

Use our free personal loan comparison service and you’ll be able to browse the market for the best loans available.