loans

how personal loans work, what the APR actually tells you, and the questions to ask yourself before borrowing anything.

the basics

a personal loan lets you borrow a fixed amount and repay it in fixed monthly instalments over an agreed term - typically one to seven years. the interest rate is usually fixed, so you know exactly what you'll pay each month and in total. loans are commonly used for a car, home improvements, or consolidating other debts into a single payment.

unsecured vs secured

• unsecured (personal) loan - not tied to any asset. the lender decides based on your credit history and affordability. most personal loans are this type.
• secured loan (homeowner loan) - borrowed against your home. rates can be lower and amounts larger, but the trade-off is serious: if you can't keep up the repayments, your home is at risk of repossession.

what the APR actually means

APR - the annual percentage rate - is the total cost of borrowing over a year, including interest and any compulsory fees, expressed as a percentage. it's the number to compare loans on.

a representative APR is the rate that at least 51% of successful applicants get. the other 49% may be offered a higher rate based on their circumstances - so an advertised figure isn't a guarantee of the rate you'll actually be given.

what lenders look at

• your credit history - how you've handled borrowing before, including missed payments, defaults and how much credit you already have.
• your income and outgoings - lenders have to check the loan is affordable for you, not just that you'd probably repay.
• how much, and for how long - a longer term means smaller monthly payments but more interest overall.
• stability - your address history, employment, and whether you're on the electoral roll all play a part.

soft searches vs hard searches

a soft search (or eligibility check) lets you see how likely you are to be accepted, and sometimes the rate, without it being visible to other lenders on your credit file. a hard search happens when you formally apply, and other lenders can see it. lots of hard searches in a short time can make you look desperate for credit and hurt your score - so check eligibility first, and apply once.

questions to ask before you borrow

• can i comfortably afford the monthly payment - even if my circumstances change?
• what's the total amount i'll repay, not just the monthly figure?
• are there fees for paying it off early? you usually have the right to overpay or settle early, but there can be a charge of up to two months' interest.
• am i consolidating debt into something that actually costs less overall - or just spreading it over longer?
• is there a cheaper option - saving up, an interest-free arrangement, or a 0% purchase card?

if you're struggling

if you're borrowing to cover essentials or existing debt, free and impartial help exists. organisations such as StepChange, National Debtline and Citizens Advice can help you look at your options before taking on more credit.

this guide is general information to help you understand the product. it isn't financial advice, and it doesn't take your circumstances into account.