Today, personal loans are offered by various financial institutions and banks. But, these loans cannot be used for business purposes as the risk involved is more. Also, most of the people are not aware of the fact that when they repay their debt before the end of the fixed term, the lenders levy heavy penalties. Nowadays, the interest rates of different personal loans are lower than what it was in the past. For instance, one can borrow 10,000 pounds at a modest interest rate of about 7%. However, most borrowers are fortunate enough to repay their debt before time and hence pay the heavy penalties levied by the lenders.

A personal loan comes under the unsecured loan category as these loans don’t require collateral. On the other hand, due to the risk involved the lender may levy high rate of interest on the loans and also the term of repayment may be less than what you get in a secured loan. You can borrow anything between 500 pounds to 25,000 pounds for a period of 6 months to 5 years. But, this will vary between different lenders and products. The rate of interest which is generally known as Annual Percentage Rate (A.P.R) is levied on the amount borrowed and before taking a personal loan you should compare the different products and their APRs.

Many lenders bury the penalty clause in the terms and conditions by printing them in small letters. Almost 75% of personal loans levy penalties for premature closures and you should analyze whether the loans carries a penalty before signing up the papers. Also, the lenders never provide the details of the penalties exactly and the way of calculating them also differs. Department of Trade and Industry (DTI) recently proclaimed that they are into reforming the Consumer Credit Act and they will also focus on the penalty clause.

The financial institutions like building societies and banks calculate the amount that you pay over the entire term using a format called Rule 78. This method distributes the interest rates unevenly and so the early part of the loan installments are used to cover up more interest and hence it will leave a bigger amount of capital outstanding. Also, the penalties for premature closure are also calculated in the same way and hence the consumers cannot never clearly understand how the settlement amount is arrived at.

In addition, the consumers should be aware of the way in which the interest rates are calculated on the personal loans. If the interest rate is fixed, then it will remain the same all through the year. But, if the rate presented is a variable rate then it may fall or rise in line with the base rate changes throughout the term. So, the borrower should know the type of interest rate and the redemption penalties before going for the loan. Otherwise, they may end up paying more than what the other reliable financial institutions charge and it may also guzzle a major part of their hard earned money.