How do personal loans work?
Personal loans are typically used for specific purchases, such as a holiday or personal belonging. Here, you borrow a specific amount of money that you agree to repay within a certain period of time (called the term). The term is usually between 12 months and 5 years, though there are variations. You will have to sign a credit contract which will specify the amount borrowed and how you will repay it.
The interest you pay depends on the amount you borrow. It may be at a variable rate (in which case the interest may go up or down over the term), or a fixed rate (in which case the interest rate is locked in for the term), in addition to any other fees and charges.
While a fixed rate loan offers the benefit of set payments, you will usually have to pay an additional fee if you want to make extra payments from time to time. You need to think about what options are most important to you.
Depending on whether you offer an asset such as your car as security for the loan, a personal loan may be secured or unsecured. Secured loans can offer a lower interest rate, but the risk here is that if you can’t pay, the credit provider may have the right to sell the security.
You can also use a personal loan to pay for a deposit when purchasing a property and also to pay for related purchase costs such as stamp duty.
It is important to carefully consider which type of loan best suits your needs.
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