What is a personal loan?

Taking out a personal loan is a way of borrowing money from a bank, building society or other financial service provider. You can usually borrow up to ?15,000 for a period that can range from six months to 10 years. Generally speaking, the more you borrow, the lower the interest, but rates vary from around 8% to 20%, so you'll need to shop around. This is made more difficult by the fact that it is not easy to compare personal loan rates because different lenders calculate the total cost of the loan (known as the APR or annual percentage rate) in different ways.

Loans can be secured or unsecured. Secured loans are usually tied to your house - which means if you default, you may need to sell your house to repay the loan. Unsecured loans are not tied into anything, but if you don't make the repayments, the bank will blacklist you and you may find it difficult to take out other financial products, such as credit cards or a mortgage. Loans for specific items such as new cars are also available, often with lower interest rates. If you're taking out a loan for a car, tell your lender.

Most loans are re-paid by monthly instalments and the repayment period will be agreed before you get the money. This is usually a fixed period and you will have to pay a redemption penalty - an example being two months interest - if you want to pay it off sooner. The longer the repayment period, the more interest you will be paying, so go for the shortest one you can manage. Flexible loans, which let you borrow and pay back at will, are becoming more common, but the interest rate charged is often significantly higher.