Personal Loans

What are personal loans?

There are so many different terms used to describe loan products in the UK today. Secured, bridging, equity, homeowner, unsecured, payday etc. the list is seemingly endless. As a result, the meaning of one of the most commonly used loan terms (personal) has become a little skewed in recent years, leaving a surprisingly large number of people unsure as to what one actually is, and whether its right for them at all.

Simply put, a personal loan is the generic term used to describe any type of loan product (secured or unsecured) acquired by a consumer who resides within the UK. Personal loans can be used for a variety personal of reasons, but they can also be used for commercial purposes (such as starting a new business) as well.

How much can I borrow?

Depending on your personal circumstances, past credit conduct and residency, borrowers within the UK can potentially borrow anywhere between £100 – £250,000 with a personal loan. If you are looking to borrow upwards of £15'000, very few lenders will be forthcoming in granting your request on an unsecured basis, so if you are a homeowner, you may be required to secure the loan against your home in order to be accepted. That said, some lenders are able (and will) arrange loans up to £25,000 for non-homeowners, but every aspect of the applicants past credit conduct, affordability and employment status will rigorously checked and assessed before this can happen. Applicants who are accepted for higher amounts, unsecured, are classed as being an exceptional prospect by their lender and in reality (unfortunately) are few and far between.

On the other side of the coin, homeowners who are willing to secure their personal loan against their property will by default, have far more scope when it comes to borrowing higher amounts. Most secured personal loans arranged through brokers will average an advance of around £26'000, whereas most unsecured loans average an advance of around £5'000.

There are also other specialist personal loans, which can be used by borrowers whose requirements, status and residency fit the bill. Such products include payday loans, equity release and student grants (or educational loans).

What sort of terms and features should I be aware of?

There are a number of common features and terms used as part of any personal loan package. Some of these terms, features and bolt on products may well confuse or even catch out some applicants if they are not careful (although they are obviously not designed to). To make your life a little bit easier, we have provided a brief list and description of the type of terms and features that you are likely to come across as part of applying for a personal loan in the UK

Typical APR

APR (annual percentage rate) refers to the actual amount of interest charged on your personal loan over the course of each year that the loan is repaid. If you qualify for a rate of 6.7%, the rate of interest you will repay each year on your personal loan is 6.7% (no confusion there then). What can be confusing however, is the inclusion of the word “typical” before the rate. When a personal loan provider includes the word typical before their repayment rate, what they actually mean is that the majority of “their” applicants will qualify for that rate (66% to be exact). This then leaves an additional 33% or 1/3 of all people qualifying for a rate, which is lower/higher than their advertised Typical APR.

Personal loan Redemption Penalties

Redemption penalties are bolt on charges, which are applicable to almost all personal loan products. Essentially, a redemption penalty is used by the provider to cover any standard loan set up costs which they may incur, and to also cover themselves against the possibility of early repayment. As a general rule of thumb, redemption penalties are applicable at the earlier stages of the loan repayment cycle and are calculated as a percentage of the total loan amount.

You should always read the terms of your personal loan agreement carefully, as exact details of these charges will be printed clearly for your review.

Payment Protection Insurance

Many providers of personal loans will offer payment protection insurance as part of your loan. This type of insurance can be particularly beneficial to some borrowers, and it can also provide peace of mind should you become unable to make your repayments due to loss of work or illness. However, not all people will require the insurance and a misguided decision to take it out could be quite costly. The best advice is to seek professional advice from an IFA or some other financial specialist (whose view is impartial) before making your decision as to whether you need it, or not.

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