Personal loans explained, from rates and fees to what to ask

Interest: 0–5%

Pros: Usually the cheapest option; flexible

Remember: Relationships are more important than money! Communicate and write up the loan terms clearly (including how much and when it will be repaid), and agree to them before any money changes hands.

Side note: Consider carefully before being a guarantor for others’ loans. If they don’t pay, you’ll have to.
 

Interest: 8–19% 

Pros: Regulated; lower interest rates for existing customers with good credit

Remember: Banks, building societies and credit union interest rates are often lower than those offered by other lenders, and they often charge fewer fees. A credit check will be required for these.

Interest: 9–23%

Pros: Member-owned; often lower rates for members

Remember: You must be a member to borrow.

Interest: 13–29%

Pros: A short-term option; best used when the balance is paid off every month

Remember: Cash advances on a credit card should be avoided because of the high interest and in some cases extra fees. Repayments can get out of hand if you don’t clear the balance each month.

Interest: 13–29%

Pros: Can be helpful in a hurry; may approve when banks don’t

Remember: Interest rates can be high and there are often large establishment fees and insurance to pay. If you get behind in your payments, the finance company may repossess things you value. Find out more about repossession and debt collection on the Consumer website.

Interest: 8–13%

Pros: Competitive interest rates (these depend on your credit score but because these online sites can sometimes reduce their running costs, they may offer lower interest to pay for borrowers); regulated by the Financial Markets Authority

Remember: Online only; newer model. P2P connects borrowers with individual investors who have money they want to put to work. The key is to use a service that’s licensed and regulated by the Financial Markets Authority, so you know they’ve been checked, follow the rules and have complaints and disputes processes in place.

Interest: 30–49%

Pros: Fast access

Remember: These are incredibly expensive. They're typically due on your next payday and carry the risk of you getting trapped by high-interest debt, so use only as a last resort. Steer clear of lenders if they’re offering money door-to-door and don’t have an office. These lenders can include ‘loan sharks’, who have extremely high, illegal interest rates and may use heavy-handed techniques to make people pay up.

Interest: 4–7%

Pros: A personal loan is usually cheaper when secured against your home from a bank or other lender. With a revolving credit home loan, you can borrow money against your house if you have balance available and stay within the original terms and limit of your loan. This kind of credit only works if you’re disciplined about making repayments and shouldn’t be used for day-to-day expenses.

Remember: If you fall behind with payments, you risk your home. Try to pay off the additional loan as soon as possible, because even if the interest rate is lower, you’ll end up paying more in the long run if your loan is spread over the whole term of your mortgage.