A Guide to Unsecured Personal Loans

Unsecured personal loans are offered by lending institutions such as banks and building societies. They are not available for business purposes and some other uses may also be excluded, for example the purchase of timeshare properties. Below is a quick and easy guide to personal loans.

STEP 1 - Which Loan?

Unsecured personal loans are available for a range of different amounts and repayment terms. They are not secured against property or other assets. The repayment term available may depend on the purpose for which you require the loan, and may be restricted accordingly (e.g Loans for holidays may be restricted to a 12 or 24 month term). The amount available usually ranges from £500 to £25,000 over a term of 6 months to 10 years. This will vary between lenders and products. The amount borrowed is subject to an interest charge, which will be quoted as a percentage. This rate is known as the Annual Percentage Rate (A.P.R). As a general guide, it is advisable to compare the A.P.Rs of different products as this will help you to determine how competitive they are.

The way lenders quote interest rates varies. A fixed interest rate will stay the same throughout the term of your loan, regardless of any changes in the bank base rate. If the rate offered is a variable rate, it may rise or fall in line with any base rate changes during the term. When lenders quote their APRs they will state whether these are "typical" or whether they are set at one rate for all successful applicants, regardless of the risk they present. The typical rate is a rate that is offered to over 50% of successful applicants, and the exact rate offered to you will depend on your personal circumstances, the amount and term of the loan along with the credit assessment procedures.

Personal loans are repayable monthly. The lender may permit over-payments and lump sum payments, which allow you to clear the loan over a shorter term than that agreed at the outset. It is important to remember that some lenders will charge you a penalty for repaying your loan early - this can be up to 2 month's interest. Lenders may offer "payment breaks" or "repayment holidays" as part of their personal loan package and these allow you to take a break from your repayments at the beginning of the loan or at any agreed point during the term. Interest may still accrue on the balance outstanding so the exact terms should always be verified with the lender.

STEP 2 - How Do I Apply?

Lending institutions offer you the option of applying for your personal loan either in person at a branch, via a written application, over the telephone or online. In many cases, lenders offer different rates depending on the method by which you apply i.e the rates for telephone applications may be different from those for online applications. Assessments are generally made very quickly based on your personal circumstances. These are often referred to as credit scoring facilities. Credit scoring assesses your personal circumstances and statistics to ascertain which broad category of borrower you fit in to. Lenders will also use credit reference agencies to obtain information about you. They provide a detailed analysis of your financial position. In particular, they provide details of county court judgements, defaults and any existing credit agreements, along with information relating to the electoral roll and your past credit history. If you are refused a personal loan or wish to make enquiries concerning your own credit file, you can apply to the credit reference agencies for a copy of your credit file.

STEP 3 - How Am I Protected?

Personal loans are governed by the Consumer Credit Act 1974. The Act contains strict regulations about how money is lent and covers unsecured loans up to £25,000. These are known as regulated loans. When taking out a personal loan you will be asked to sign a credit agreement, which you should read carefully before you sign as you will be bound by it's terms. Lenders offer insurance policies or payment protection schemes to protect you in the event of accident, illness, unemployment and death (subject to conditions), for which the charge is added to your monthly repayment. The cover and cost does vary between lenders and you should check what their policy includes, and just as importantly, what it excludes.

If you are considering protecting your repayments in the event of accident, sickness, unemployment or death, why not browse our Income Protection finder.

If you do have difficulty making your repayments you should seek advice from your lender immediately. The earlier you contact them, the more sympathetic they are likely to be. You can also seek advice from a voluntary organisation such as The Citizens Advice Bureau.

These Products are not regulated by the Financial Services Authority (FSA)