Personal Loans

Did you know that more than 60% of the UK's borrowing population use personal loans? To find out more about this particular form of finance, make sure you read our impartial guide.

Why are Personal Loans popular?

Personal loans are widely available in the UK today, for almost anyone over the age of eighteen, who are able to show that they are able to reasonably afford the monthly repayments.

In the past, if someone wanted to purchase a particular item of any significant value, they had to save up over a period of time to raise the necessary funds. This was basically down to two reasons: firstly, borrowing money was regarded as socially unacceptable and secondly, there was only a very limited choice for anyone who wanted a personal loan.

These days, attitudes have changed. People don't want to have to save long and hard to buy the things they want and are more likely to take out some form of personal loan to fund the purchase, so that they are able to have that new car, or item of furniture straight away, instead of having to wait perhaps a couple of years before they can afford it.

This change in attitudes, coupled with the fact that there is such a wide choice of personal loans available in the market, most of which are so easy to apply for, has led to record levels of debt in the UK today. Indeed, there are many individuals who have fallen into the trap of applying for an excessive number of personal loans and other finance agreements, without taking into account the long term affordability of the repayments and there is an increasing number of people who now have a poor credit rating due to missed payments and defaults, who may be faced with County Court Judgements or in extreme cases, individual voluntary arrangements or even bankruptcy.

Despite this stark outlook and the negative impact this may have on someone who is considering applying for any type of finance, personal loans can still be an extremely useful tool in an individuals' personal financial arrangements, particularly when it is used sensibly and the applicant does not over commit themselves.

Using personal loans to control debt

Personal loans can be used for any legal purpose, which means that, apart from being used solely for new purchases, it could be taken out for the purpose of debt consolidation, whereby various loans and credit cards can be paid off with the proceeds of a new personal loan, leaving only one manageable monthly outgoing rather that several payments which could add up to significantly more. Anyone using personal loans for debt consolidation should remember that although they may have saved a lot of money each month, the debt has not gone away and could even cost more than the original debts if payments are made over a longer period of time.

Common borrowing options

Personal loans can take on many different shapes or forms depending on the specific purpose of the loan. These different types of loan fall into two basic categories: unsecured personal loans and secured personal loans.

Unsecured Personal Loans

An unsecured personal loan is one where the lender is prepared to offer the loan without any form of security. If the borrower were to default on this type of personal loan, the lender has very little comeback against the borrower to reclaim the debt. Clearly, this sort of lending poses a higher level of risk to the lender, which leads to more stringent checks being carried out on the applicant prior to being accepted.

Unsecured personal loans also tend to be limited to smaller amounts of money over a shorter term of years, to limit the exposure of the lender. The interest rates charged are often higher than those of secured personal loans and can vary widely to reflect the level of risk the lender feels they are exposed to. An individual with anything less than a clean credit rating is unlikely to be accepted on an unsecured personal loan and should consider a secured personal loan.

Secured Personal Loans

A secured personal loan represents a much lower exposure to risk for the lender than an unsecured personal loan, as the loan itself is secured on the property of the borrower. Usually the security taken for the loan is the borrowers' own home, but could take the form of other assets such as a second house or other valuable goods. The lender takes a legal charge over the property in question, which allows them to claim the outstanding balance of the loan, plus any charges and penalties, from the value of the secured property in the case of the borrower defaulting on the monthly repayments. This could mean repossession of the borrowers' house in order to repay the secured personal loan.

Due to the fact that the lender has this sort of security for the loan, the risk to them is significantly less than that of an unsecured personal loan and this is reflected in the lending criteria. The interest rates charged on secured personal loans are often lower than those of an unsecured loan and larger sums of money may be borrowed over longer periods of time, reducing the monthly costs significantly. Even someone with a poor credit history could be accepted for a secured personal loan, although the interest rate charged would be higher than for someone with a clean credit record, to reflect the individuals' personal circumstances.

Conclusion

To summarise, personal loans are readily available to most people and can take on many different forms. Before applying for a particular personal loan, it is a worthwhile exercise to research the various options on the market and to ensure that the monthly repayments are affordable both now and in the future. It is worth taking expert advice regarding personal loans from either an independent broker or by logging on to one of the many financial comparison sites, both of which offer sound advice to individuals and can also assist in recommending a particular personal loan to suit ones needs.