Understanding personal loans

Personal loans are loans taken out for various reasons such as home improvements, consolidating other debts, or major purchases. The loan repayment period or term usually ranges from 1 to 7 years.

How it works

You borrow a fixed amount, repayable in fixed monthly instalments with interest. You may have the option to secure your loan against an asset, in which case you may get a lower interest rate.

As mentioned earlier, most lenders impose limits as to the amount you can overpay each year. Before making overpayments, check with your lender how much you could overpay before incurring any penalties.

Positives

Flexibility in use and fixed repayments allowing you to budget for repayments. The repayments are set up in a way that you’ll have cleared the debt at the end of the term. You can choose how long you’d like to take the loan for (note that a longer repayment term will cost more interest).

Negatives

Penalties for early repayment in some cases, potential for debt build-up if misused. You often won’t know the exact rate you’ll get until you apply (depending on your credit score you may not receive the advertised rate).