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What is a personal loan?
Personal loan; unsecured loan; homeowner loan; secured loan; payday loan; guarantor loan - there’s so much loan jargon out there it’s easy to get mixed up. And it also makes it hard to know which is the right loan for you.
Here on the Ocean blog we want to ban the jargon and clear up any questions you have about loans. We’ve already looked at what a secured loan is; now let’s take a closer look at personal loans.
Made to measure
With a personal loan - also known as an unsecured loan - you apply for the cash you want and agree to pay it back over a set amount of time for a fixed sum each month. In return for borrowing the money, you’ll be charged interest - and the amount you pay will be agreed when you take out the loan.
Personal loans tend to be available for smaller sums than, say, a homeowner loan, and you don’t need to own a property to take one out. Instead, lenders will look at your income and your credit history to determine whether you’ll be able to afford the repayments.
You can use a personal loan to pay for just about anything. However, because it can come with a high rate of interest attached we advise you only take one out if you need money for an important project (like home improvements or a new car), an emergency (like paying for a new boiler), or to consolidate your existing debts and make them easier to manage.
Why choose a loan?
There are countless options available if you need to borrow, and they’re not all loans. For example, you may have a credit card you make purchases on or an overdraft you use as a buffer in case you run out of cash at the end of the month.
Unlike the two options above, with a personal loan you make an agreement with your lender about how much you plan to borrow. This is the amount you’ll then receive and the amount you’ll pay back, plus interest. So it’s quite a simple way of borrowing and you should find budgeting for the repayments is straightforward as you always know how much they’ll be.
Why choose a personal loan?
Of course, there are other types of loan available and you may wonder whether one of these may be more suitable. Well, as we mentioned earlier in this blog, a secured loan - also known as a homeowner loan - is only available to those who own property. That’s because the money you borrow is secured against your home. While this means that you can usually borrow more at a lower rate of interest than you would with a personal loan, you’ll also be making repayments for longer and may pay more interest in total. Plus, if you don’t make your repayments your home could be at risk of repossession.
Meanwhile, a payday loan usually lets you borrow less than you could with a personal loan and the window in which you have to pay the money back is far smaller. And with a guarantor loan, you need another person to formally agree to take over your repayments if you can’t keep up with them.
If you know how much you need to borrow and how much you can afford to repay each month, you’re not looking to borrow more than about £25,000 and you have a positive credit history, a personal loan might be everything you’re looking for.
Am I eligible for a personal loan?
If you’re considering applying for a personal loan, you first need to work out how much you can afford to pay towards it each month. You lender will look at your income and your application may be turned down if they’re concerned you can’t afford the repayments. You should only ever borrow what you can afford to repay so you don’t find yourself stretched each month.
Your credit history is also important if you’re applying for a personal loan. This is a record of all the lines of credit you’ve had open to you for the past six years along with details of your repayments for each. If you have missed payments in the past, the lender you apply to can see this and may turn down your application if they think you’re unable to borrow money responsibly.
If you don’t stay on top of your repayments each month, you could be hit with charges or fines by your lender. As well as this making your repayments more expensive, the missed payments will also show up on your credit history and could make it difficult for you to borrow again in the future.
We hope we’ve answered a few of the questions you may have had about personal loans. Keep checking the blog as we bust more financial jargon.