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