There are many different ways of borrowing money - ranging from a bank overdraft to a credit card, hire purchase agreement or mortgage. Different methods of borrowing suit different situations and different people...

Bank overdrafts - easy to arrange and usually costing nothing for the periods when you aren't using it. Very convenient & flexible but charges can be high, especially if you exceed the agreed limit.
Credit card - very convenient, very flexible and very cheap over 6 months - if you take advantage of the low introductory rates. But can be easy to rack up large debts and will be expensive over the longer term.
Unsecured personal loan - offers a fixed repayment schedule for a larger loan, which allows you to take control of your debt. Best suited for loans of between £500 and £25k over a 1-5 year repayment period.
Hire purchase - allows you to buy larger items that you might not have been able to finance on a credit card or through a bank loan, e.g. car finance. You don't own the item until you have paid back the full amount outstanding.
Secured loan - a longer term loan for larger sums of money, secured against the equity in your home. Can be expensive to arrange, but will allow you to spread the repayments over many years.

When choosing a credit deal, it is important that you get the best value for your money. One way to compare deals is to work out the interest and monthly payments using our loan calculator, which will help you work out how much each loan will cost.

Unsecured Personal Loans

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Unsecured personal loans are available for a range of different purposes. And you can typically choose to borrow any amount between £500 and £25,000 and repay it over any period between 3 and 5 years - although loans of £10k and above can sometimes be repaid over extended periods of up to 10 years.

Personal loans are governed by the Consumer Credit Act 1974. The Act contains strict regulations about how money is lent and covers unsecured loans up to £25,000 (these are known as 'regulated loans').

You also have the choice of taking out a fixed or variable rate loan, depending upon your views on the direction of future interest rate changes:

A fixed rate loan is so called because the interest rate is fixed for the duration of the loan - it doesn't change in line with any bank base rate fluctuations. This means that your monthly repayments will always stay the same, allowing you to budget accurately.
A variable rate loan is so called because the interest rate will rise and fall in line with any changes to the bank base rate - which will also mean that that your repayments could rise or fall during the term of your loan.

Personal Loans: Charges & APR

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One unsecured personal loan is effectively the same as the next - they all provide you with a wad of cash in your pocket at the end of the day. However, they do vary extensively in their terms and how much they cost to repay:
Interest payments - this is the amount of interest that you pay for the privilege of borrowing money from the lender. Rates are quoted in the form of an 'Annual Percentage Rate' or APR (see below).

The rate for an unsecured loan can vary from around 5% at the cheaper end of the scale, to around 30% for a less competitive loan (And up to 50% if you are considered a particularly bad risk!). The interest rate charged will vary depending upon the lender and your own personal credit profile - the cheapest loan rates are typically reserved for the more credit-worthy applicant who perhaps doesn't even need the loan anyway!
Arrangement fee - although not common, there are still a number of lenders who will charge a fee to cover their administration costs for setting up the loan. This charge will again depend on your credit history, the size of the loan and the individual lender. Arrangement fees typically cost between 0-10% of the loan amount.
Early repayment fee - a lender makes his money on charging interest on the loan - and the rate is carefully calculated so that it covers the cost of borrowing the money plus a small profit. If you repay the loan early you take away the lender's profit. So most lenders will charge an early repayment fee of between 0 and 6 months' interest if you repay the loan before the end of the agreed period.

APR

Every lender is obliged to state its charges in the form of an 'Annual Percentage Rate' (APR) in order to assist you to make comparisons between different loans. An APR takes into account:

the interest you must pay,
any fees that you must pay,
when and how often you pay the interest and any fees.

In theory, the APR is supposed to provide you with a comparative figure for the total cost of each loan over a full year.

In reality, different lenders use different figures and time periods to calculate the APR - they may or may not include special offers in the calculations and certainly don't include penalty fees.

So don't take these figures as gospel, but use them as a good indication for comparative purposes.

Price for Risk

Another common practice that you should be aware of in the loans industry is 'price for risk' - a phrase used to explain the lenders giving their cheapest interest rates to the more financially secure borrower and the worst rates to those individuals in greatest need of a loan - but also most likely to default on the repayments.

The typical interest rate published in most adverts is only an indication of the rate that you will be offered when you apply - after an assessment of their personal circumstances, most applicants will receive the typical rate whilst the rest will be offered a less attractive rate.

Any company advertising a set interest rate will offer the same rate to all successful applicants, regardless of the loan and the risk that they represent.

How to Choose Personal Loans

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There are a number of factors to consider when deciding which lender to use for a personal unsecured loan. Much of this will depend on finding the most competitive lender for your own particular credit profile and loan requirement. But there are also a few other variables worth considering:
Loan amount - loans are typically available for between £500 and £25,000. Check that the lender will offer the amount you require.
Repayment period - typically 0-5 years. Other periods may be available from different lenders.
Interest rate - the most important factor in your decision. Remember - different lenders have different ideas of the ideal customer, so look around for the best rate available to you.
Fixed or variable rate - depending upon your own preference.
Online decisions - you can often get an immediate decision from the online lenders.
Deferred repayment option - gives you the option to take a payment holiday if you occasionally have other commitments.
Payment protection insurance - insurance to cover your loan repayments in the event of your not being able to pay due to sickness or unemployment. This is a nice idea, but often comes with severe limitations and can be expensive, so check the terms closely and perhaps buy this cover independently, not from the loan provider.

Personal Loans: Credit Scoring

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When you apply for a personal loan - or any other type of credit arrangement - it is likely that the lender will 'credit score' your application.
What this means is that the lender will assess your ability to repay the loan and will use this information to decide:
whether to accept your application,
how much money to lend you (perhaps less than you have applied for),
what interest rate to charge you (perhaps a higher rate than you have seen advertised - see 'price for risk').

Your credit score is calculated differently by every lender - each will have their own idea of what constitutes an ideal customer. This calculation uses the information that you have supplied on your application form as well as a 'credit reference check' provided by a specialist credit reference agency.

Credit reference agencies hold historical credit information on most adults in the UK. Lenders will access this information to assess the risk of lending to each individual and reduce the risk of fraud. This information falls into three main categories:
Public record information - presence on the UK electoral roll (used for checking names and addresses), county court judgements (CCJs), bankruptcies, etc.
Other credit information - lenders share customer information with the credit reference agencies. This shows whether people have a good or bad credit history or have payment loans outstanding with other lenders.
Search information - the file also records all the credit checks carried out by other lenders. A large number of applications made over a short period of time could be seen as an indication of fraud. There are three main credit reference agencies in the UK - Callcredit, Equifax and Experian.

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