What Is A Personal Loan?
A Personal Loan is borrowing a specific amount of money for an agreed period of time. Every month a set amount is paid back, and this will include any interest that comes with the loan. Personal Loans are also known as unsecured loans because there when you take out the loan you don’t have to secure the loan against something valuable that you own, such as your home. To find out more about Secured Loans Click here.
Personal Loans are usually fixed interest which means the repayment amounts on the loan wont change.
What Would You Use It For?
You can use a Personal Loan for most things. You normally don’t have to clarify what the loan is for. Typical reasons for Personal Loans are:
- A new car
- Education costs
- Home improvements
Obviously you can’t use a Personal Loan for anything illegal and it’s never ever a wise move to get a loan for anything that is high risk.
Debt consolidation is another reason for taking out a Personal Loan. By consolidating your debts you can get all of your repayments into a one off monthly payment rather than multiple amounts. This may make it easier to manage and also reduce the interest you’re paying.
You may also look to consolidate debts by using a 0% Balance Credit Card. This will allow you to transfer your credit card debts to one card, paying no interest on them for a set period.
Interest is calculated as a percentage of the total amount you owe. This is usually charged on a monthly basis. So obviously the longer the loan duration the more interest you will have to pay. This means its vital to budget your income and expenditure to ensure you can afford the monthly payments.
For example, say you borrowed £10,000 at an interest rate of 5% over ten years. You’ll make monthly payments of £105.52, and pay a total of £2,662.82 interest over the entire term.
Now let’s say you have the same loan, except it’s for five years rather than ten. You’ll make larger monthly repayments of £188.20, but you’ll pay a smaller total of £1,292.24 interest overall.
|Loan Term||10 Years||5 Years|
|Total Interest Paid||£2662.82||£1292.24|
|Total Amount Paid||£12,662.82||£11292.24|
Remember when you compare loans, it’s helpful at their APR. This is the interest rate plus any additional fees for taking out the loan.