Whilst the intentions behind a home loan are pretty straightforward, those behind a personal loan are somewhat broader. Amongst a whole heap of personal requirements, a personal loan may assist you in financing the furnishing of your home; put you in the driving seat of a new car; purchase a new computer system; or maybe take a much deserved holiday.
If you are in a steady employment, the bank will normally grant you a personal loan of up to a maximum of five years. The interest rate is normally variable, i.e. a fixed percentage over the bank's base rate, but some banks may also offer you the possibility to fix the rate of interest for a certain number of years.
The cost of borrowing depends on whether the personal loan facility is secured or not. If you opt to offer something as security (such as your home or a pledge on an investment or a bank account) to provide collateral, the bank will tend to charge you a lower rate of interest. The more liquid the security being offered the slimmer the rate of interest applicable to your personal loan. On the other hand, if you decide to apply for an unsecured personal loan, the granting of such facility will be based on your ability to effect the monthly repayments out of your disposable income, your track record with the bank, and any other good record of repaying any previous loans with any other bank.
Consequently, given that no security will be backing the amount borrowed; an unsecured loan will attract a higher rate of interest as it involves the bank in a higher credit risk than a secured loan.
If you don’t need to borrow for a specific purpose but you need to finance your day to day expenses, an overdraft facility might be the solution you are looking for. An overdraft is a loan arrangement under which a bank extends credit up to a maximum amount (called overdraft limit) against which a current account customer can write cheques or make withdrawals to cover short term cash flow problems. Keep in mind however that if you go overdrawn without your bank’s authorisation, the charges are likely to be high. Your bank may also refuse to honour cheques you write or refuse to pay standing orders and charge fees for each refused transaction. It may also charge additional administration fees. Unlike a personal loan, in an overdraft arrangement the borrower will not have to make monthly repayments. An overdraft is a type of revolving loan where deposits (credits) are available for re-borrowing, and interest is charged only on the daily overdraft (debit) balance. It is, however, a demand loan as well - the facility can be cancelled at any time by the lender at its discretion (often referred to as ‘called’), without any warning notice or explanation and hence the balance will have to be repaid back at once.
Independently of the type of credit you decide to apply for, make sure that you ask this question to yourself first: ‘Can I afford it?’. It is important to consider your earnings and other expenses before you commit yourself to a loan. You might want to access our budget calculator to help your organise your finances. Last updated: Sep 07, 2016