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What is Personal Loan Debt?

A personal loan is money borrowed from a bank, credit union or online lender that you pay back in fixed monthly repayments, or instalments, typically over two to seven years.

Though it’s usually best to dip into your savings or emergency fund to cover unexpected expenses, personal loans can be a good option for non-discretionary purposes, like debt Consolidation.

The basics

A personal loan is when a person or an organisation, such as a bank lends you a lump sum of money for a small cost (stated in a percentage interest rate). In other words, it is when a consumer purchases a lump sum of money to make a purchase.

For example, Mary wishes to do some basic home renovations but doesn’t have the money saved up to do so.  So, she goes and secures a short term personal loan from the bank at the cost of paying back the full amount plus interest over an agreed period of time. The percentage interest is the cost that the bank charges for providing Mary with the lump sum. 

How do personal loans work?

Most personal loans are unsecured, meaning they’re not backed by collateral. Lenders decide whether to give you an unsecured loan based on factors such as your credit score, credit history, debt-to-income ratio and free cash flow.

If you don’t qualify for an unsecured loan, you may be offered a secured or co-signed loan. Secured loans are backed by an asset like your home or car, and the lender can repossess your property if you default. Co-signed loans include an additional applicant with a strong credit profile who will help guarantee the loan; they are responsible for missed payments.

Other types of personal loans include fixed-rate loans, in which your rate and monthly payments stay the same, or variable-rate loans, in which your rate and payments change.

Types of personal loans

There are two types of personal loans — secured and unsecured.


Unsecured loans aren’t backed by collateral. The lender decides whether you qualify based on your financial history. If you don’t qualify for an unsecured loan or want a lower interest rate, some lenders also offer secured loans.


Are backed by collateral, such as a savings account or CD. If you’re unable to make your payments, your lender typically has the right to claim your asset as payment for the loan.

Benefits of personal loans

There are both advantages and disadvantages to choosing a personal loan over another financing option. Here are some factors to consider when making your decision.

Personal loans can offer benefits over other types of loans. Below are a few advantages of using this type of financing over other options.

Flexibility and versatility

Some types of loans can only be used for a certain purpose. For example, if you take out a car loan, the only way to use the funds is to purchase a vehicle. Personal loans can be used for many purposes, from consolidating debt to paying off medical bills. If you want to finance a major purchase but don’t want to be locked into how you use the money, a personal loan can be a good alternative. Check with your lender on the approved uses for the loan before applying.

Lower interest rates and higher borrowing limits

Personal loans often come with lower interest rates than credit cards. Consumers with excellent credit history can qualify for personal loan rates in the range of 6 per cent to 8 per cent. You may also qualify for a higher loan amount than the limit on your credit cards.

No collateral requirement

Unsecured personal loans don’t require collateral for you to get approved. This means you don’t have to put your car, home or other assets up as a guarantee that you’ll repay the funds. If you’re unable to repay the loan based on the agreed-upon terms with your lender, you’ll face significant financial consequences. However, you don’t have to worry about losing a home or a car as a direct result.

Easier to manage

One reason some people take out personal loans is to consolidate debt, such as multiple credit card accounts. A personal loan with a single, fixed-rate monthly payment is easier to manage than several credit cards with different interest rates, payment due dates and other variables. Borrowers who qualify for a personal loan with a lower interest rate than their credit cards can streamline their monthly payments and save money in the process.

Risks of personal loans

Personal loans can be a good option for some, but they are not the right choice in all situations. Here are a few negatives to consider before taking out a personal loan.

Interest rates can be higher than alternatives

Interest rates for personal loans are not always the lowest option. This is especially true for borrowers with poor credit, who might pay higher interest rates than with credit cards.

Fees and penalties can be high

Personal loans may come with fees and penalties that can drive up the cost of borrowing. Some loans come with origination fees of 1 per cent to 6 per cent of the loan amount. The fees, which cover loan processing, can either be rolled into the loan or subtracted from the amount disbursed to the borrower.

Some lenders charge prepayment penalties if you pay the balance off before the end of your loan term. Before applying, review all fees and penalties of any personal loans you are considering.

Higher payments than credit cards

Credit cards come with small minimum monthly payments and no deadline for paying your balance off in full. Personal loans require a higher fixed monthly payment and have to be paid off by the end of the loan term.

If you consolidate credit card debt into a personal loan, you’ll have to adjust to the higher payments and the loan payoff timeline or risk defaulting.

Can increase debt

Personal loans can be a tool for consolidating debt such as credit card balances, but they do not address the cause of the debt. When you pay your credit cards off with a personal loan, it frees up your available credit limit. For overspenders, this offers an opportunity to rack up more charges rather than free themselves from debt.

Is a personal loan right for you?

Personal loans are an attractive option if you need quick cash; with many lenders, especially those that operate online, funds can be made available in a matter of days. Interest rates can also be low, particularly if you have good credit, making personal loans a good way to consolidate and pay off credit card debt. Other good reasons to use personal loans include paying for emergency expenses or remodelling your home.

However, personal loans are not a good idea for everyone. After all, personal loans are still a form of debt. If you know that you have a habit of overspending, for instance, paying your credit cards off with a personal loan may not make sense if you’ll immediately begin building up a new credit card balance.

You’ll also want to consider a personal loan’s repayment timeline and monthly payments. Before accepting a personal loan, use a personal loan calculator to determine whether or not you can afford the monthly payments for the term you’ll spend paying it off. In some cases, it may make more sense to build up your savings to pay for a large purchase instead of taking out a loan and making payments with interest for many years.

How Debt Consolidation Loans Work

Debt consolidation is the process of using different forms of financing to pay off other debts and liabilities. If you are saddled with different kinds of debt, you can apply for a loan to consolidate those debts into a single liability and pay them off. Payments are then made on the new debt until it is paid off in full.

Most people apply through their bank, credit union, or credit card company for a debt consolidation loan as their first step. It’s a good place to start, especially if you have a great relationship and payment history with your institution. If you’re turned down, try exploring private mortgage companies or lenders.

Creditors are willing to do this for several reasons. Debt consolidation maximizes the likelihood of collecting from a debtor. These loans are usually offered by financial institutions such as banks and credit unions, but there are other specialized debt consolidation service companies that provide these services to the general public. If you would like more information on an unsecured debt consolidation loan then seek debt advice.

Get free debt advice today

If you are struggling to pay off a personal loan then you can get free debt advice from IVA Advice. While many people may be wary of asking for help, it’s important to take responsibility for your situation. We will offer you a plan that deals with all aspects of your financial situation, including debt advice. If you feel like there’s nothing you can do to deal with your debts, and you want debt advice on writing them off and doing monthly payments, then contact IVA Advice. We can help you with a debt solution, debt management plans or IVA proposal. We’ll help you to prepare a budget and work out what options there are to deal with your debts. Call IVA Advice and chat with us, so we can understand the best way to help you.

Important considerations

Before taking out a personal loan, make a plan for how you’ll use the funds and how you’ll repay them. Weigh the pros and cons of taking out a personal loan rather than using another financing option. Review alternatives such as a home equity loan, a HELOC or a credit card balance transfer. Use a Bankrate calculator to help you determine the best borrowing option for you.

If you’re considering a personal loan, get quotes from several lenders to compare interest rates and loan terms. Don’t forget to read the fine print, including fees and penalties. Once you have all the data, decide if the benefits outweigh the drawbacks before making a commitment.

How to deal with your personal loan

When you take out a personal loan you borrow a fixed amount from a bank or creditor and repay in fixed amounts over an agreed number of months or years. You know how much you need to pay back each month, and how long you need to make the payments.

Interest is charged on most loans. The rate of interest will depend on a number of different factors, including the amount of money you’re borrowing, the term of the loan and your credit rating.

Most personal loans are unsecured, which means the loan isn’t secured against your home. Secured loans carry a higher risk as your home may be repossessed if you fall behind with payments.

What happens if you can’t afford to pay your loan?

If you’re struggling to pay your loan or have arrears, you should first speak to your lender to see what help is available. They may be able to agree to let you catch up with any arrears or offer a payment break, but this depends on the lender and your agreement.

If you don’t pay your loan arrears you’ll be sent a default notice, which gives you an opportunity to catch up with your arrears. If you don’t take steps to deal with the debt the loan will default, usually after 2-3 missed payments.

Once the account has defaulted your creditors can take action to get you to pay them back. This includes:

  • Reminder letters and telephone calls from creditors
  • Additional interest and charges could be added to the loan
  • Further court action, such as a County Court judgment (CCJ)
  • The debt could be passed to a debt collection agency


It’s important to take steps to deal with the arrears to prevent your situation from getting worse. You may feel under pressure to make payments you can’t afford, or be worried about the action creditors can take, but we can help you deal with your situation.

If your financial situation has been negatively affected by a coronavirus, it’s understandable that loan payments that were affordable when you agreed to the terms of the loan may suddenly be much harder to pay. If this is the case, get in touch with your creditor to discuss your options.

Help with personal loan payments

Creditors are helping to support personal loan customers who are struggling to make their agreed payments by:
  • Reducing loan repayments for two or three months
  • Offering payment holidays for up to three months
  • Ensuring payment holidays won’t affect customer credit ratings
There is another option known as an unsecured Debt Consolidation loan. A debt consolidation loan will help you pay off your existing debts. Below we will explain how Debt consolidation loans work.

What Is a Debt Consolidation loan ?

A debt consolidation loan refers to the act of taking out a new loan to pay off other liabilities and consumer debts. Multiple debts are combined into a single, larger debt, such as a loan, usually with more favourable payoff terms—a lower interest rate, lower monthly payment, or both. Debt consolidation can be used as a tool to deal with student loan debt, credit card debt, and other liabilities.  
  • Debt consolidation is the act of taking out a single loan to pay off multiple debts.
  • There are two different kinds of debt consolidation loans: secured and unsecured.
  • Consumers can apply for debt consolidation loans, lower-interest credit cards, HELOCs, and special programs for student loans.
  • Benefits of debt consolidation include a single monthly payment in lieu of multiple payments and a lower interest rate.