What is a personal loan?
A personal loan is when you borrow a sum of money from a lender and pay it back in instalments over a set term, chosen by you, based on the amount of money you’ve been approved to borrow.
What can I use a personal loan for?
A personal loan is typically used to cover the cost of an emergency expense. This could include urgent car repairs, a broken boiler, or veterinary treatment for your pet.
How does a personal loan work?
1. If approved for a personal loan, the lender will send the money to your bank account.
2. Use the money to cover a necessary cost, such as an unexpected bill.
3. Repay your personal loan, plus interest, in monthly instalments throughout your chosen loan term. It’s important to make your repayments on time each month.
Different types of personal loans
When searching for a personal loan, you may notice that two options regularly appear: secured and unsecured.
A secure personal loan is when the money you borrow is ‘secured’ against an asset, such as your car or home. If you default on your repayments, the lender can seize and sell the asset to regain the money they’ve lost.
With an unsecured loan, you are not required to tie the money you borrow to an asset, and it is therefore generally considered to be more of a risk to the lender. If you fail to make a repayment on an unsecured loan, you could be charged a fee.
Please note that your credit score will be negatively affected if you default on a secured or unsecured loan.
Are secured or unsecured loans better?
It’s impossible to say whether one type of loan is ‘better’ than the other, because this will depend on the individual borrower and their financial circumstances.
Careful consideration and research are required before you apply for any credit product. The most important question to ask yourself is whether you can afford to repay any money you borrow. Remember, your monthly repayments will include interest, and you should take this into account when working out how loan repayments will affect your monthly budget.
If you’re thinking about searching for a secured loan, it’s crucial to be aware of the risks involved; if you default on your repayments, you could lose your car or home.
Free financial advice
If you’re worried about money or debt, please reach out to any of the following organisations for free, impartial advice and support: StepChange, MoneyHelper, Citizens Advice, and National Debtline.