A personal loan is an amount of money that you borrow from a building society, bank or other lender. A personal loan may be the best option if you are thinking of borrowing money for a short period, say up to five years.
Types of personal loans
There are two main types of personal loans;
• Unsecured personal loans
• Secured personal loans
A secured personal loan will have the equity in your property offset against the amount you intend to borrow. Remember! Your home is at risk if you fail to keep up repayments on your mortgage or other personal loans secured against. Unsecured personal loans are not secured against your home or other property.
Personal loan or Re-Mortgage?
If you already have a mortgage it may be better for you to remortgage, rather than applying for a new personal loan. By remortgaging it may be possible to add to the existing mortgage and often you won’t end up paying the higher interest rate of a personal loan. Your mortgage could have redemption penalties; therefore the cost of remortgaging could be more than taking out a personal loan.
Credit scoring and eligibility for a personal loan
When applying for a personal loan, the lender will carry out a full credit check on you. If you are declined a personal loan it could be because you have had County Court Judgments registered against you in the past, previous applications for credit declined, defaulted on payments, been in arrears on a mortgage, etc.
With numerous ways of determining the interest rates of personal loans, borrowers can become confused as to what the entire borrowing cost of a personal loan to them could be.
The Interest rate charged for personal loans depends on various options, such as:
• Length the personal loan loan is taken over
• The amount of liquidity in your property
• Your credit history
• Recent economic factors
An unsecured loan, or an unsecured personal loan, will not use your house as security for the personal loan. However, an unsecured personal loan could be more suitable for people who don’t own property, such as council tenants or private tenants or people living with relatives, they are available to homeowners too.
A secured personal loan, or a home loan, is secured against your home; this typically allows lenders to offer higher loan amounts, usually at lower rates of interest.
Typically, it‘s possible to borrow from £500 - £25,000 using an unsecured personal Loan, which can be used to spend on anything you choose.
It goes without saying; the sensible thing is not to borrow money at all. The problem though is buying a car, a home or investing in a business or education usually requires money you may not have easy access to. This is where a personal loan, in these situations, could outweigh the costs in the longer term.
Generally speaking it’s best to choose the lowest rate of APR available when choosing a personal loan. This will ensure you payments are lower and as a result you may be able to afford to repay the personal loan sooner.
Many people use personal loans to pay off a number of different loans using the personal loan. Money raised in this way can be used to repay credit cards and other loans and could reduce the overall cost of your credit. But, as it’s likely to be a secured personal loan you will be using it to consolidate previously unsecured debts, so whilst the interest you pay is likely to be lower, the risks associated with consolidating are significantly higher. We advise your consult a loan professional who can help you through the maze of options to find the right personal loan to suite your needs.
Personal loans secured against a property which already has a mortgage are known as second charges. Loans secured against a property that is owned outright without a mortgage in place, is known as first charge.
Secured personal loans have more recently become a more workable option, especially if you want to borrow large amounts over a longer time. Conversely, if you want to borrow smaller amounts over shorter timescales, an unsecured personal loan may well be the more suitable option.
Worth remembering, with a personal loan the amount you can borrow, the term available and the interest rate you pay will be reliant on the amount of equity you have in your home, the view the lender has of your ability to repay any borrowing and your personal circumstances.
Advantages and disadvantages of taking out a personal loan
Unsecured personal loans are available for a range of different amounts and repayment terms. Larger personal loan such as those for over £10,000 can usually be taken over longer terms, for example between seven and 10 years, and the maximum you can borrow this way is about £25,000.
With secured personal loans, the typical amounts available to borrow vary from £3,000 to £50,000. However, there are lenders who offer lending of up to £100,000. Just like unsecured personal loans, the amount you borrow is repaid monthly over a term that is agreed at the start, which will typically be between three and 25 years.
It is worth noting that failure to pay for your personal loan on time will adversely affect your credit score, which will make it more difficult to borrow in the future. Furthermore, it is likely the lender of your personal loan will enforce payment charges too.
If you are taking out a personal loan with the view to consolidate existing debts, clearly it’s vital you pay off all your creditors and to close all the old accounts too. If you don’t you could be tempted to run up more debt in the future.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER DEBT SECURED AGAINST IT. Securing short term debts against your home could increase the term over which they are paid and therefore increase the overall amount payable.
Personal loans are not regulated by the Financial Services Authority.
Should you have a need for a Personal Loan you will be referred to a third party provider. Neither Frog Financial Management nor First Complete Ltd accepts responsible for the advice provided by the third party.