Unsecured Personal Loans

Personal loan Charges

A personal loan is a lump sum that you typically borrow from your usual bank, another bank or through a shop where you are buying a large item, such as a car or washing machine. You agree to pay back the loan over a fixed number of years (called the 'term') by making set monthly payments.

There may be an arrangement fee when you take out the loan.

You can usually pay extra for payment protection insurance. This pays your monthly payments for you if you are unable to work because of illness or unemployment. However, check the insurance would cover your type of work (for example, casual working might be excluded) and be aware that there is sometimes a delay of several weeks between making a claim and the policy paying out. You don't have to take out this additional insurance if you don't want to.

You pay interest at a fixed rate on the amount you borrow. All the interest charges throughout the term of the loan and the repayment of the amount borrowed are added together and then divided into equal monthly payments.

You can pay off a personal loan before the end of the term. Often, there will be a charge equal to part of the interest you would have paid had you kept the loan for its full term.

Personal loans Charges - APR

What you pay for a personal loan can be expressed as an 'Annual Percentage Rate' or APR. An APR takes into account:

• the interest you must pay;
• any other charges you must pay - for example, an arrangement fee or the cost of payment insurance; and
• when and how often you pay the interest and charges.

You do not need to know how to work out an APR. The important thing is that APRs show the cost of borrowing on a standard basis. So you can compare one APR with another.

The APR also lets you compare the cost of personal loans with other types of borrowing. A loan with a lower APR is cheaper than a loan with a higher APR.

The APR does not take into account charges you might have to pay, such as an early repayment charge if you pay off the loan before the end of its term.

Personal loans Terms

Some loans are restricted to particular uses - for example, home improvements.

You may be required to open a current account with the lender, if you are not an existing banking customer.

You might be required to take out payment insurance (to keep up the repayments if you are unable to work because of illness or unemployment) but often this is optional.

Check what charges are made if you decide to pay off the loan early.

Personal loans Risk

The main risk is that you cannot keep up the loan repayments.

Some personal loans are secured - usually against your home. This means that, if you do not keep up the payments, the lender can sell your home to recover the loan.

Most personal loans are unsecured. If you do not keep up the payments, the lender can take you to court. The court will probably order you to pay off the loan, perhaps in smaller monthly amounts spread over a longer period or might allow the lender to seize and sell some of your possessions to recover the loan. You will probably find it hard to borrow elsewhere if you have a county court judgment against you.