Personal Loans Explained: UK Borrowing Guide

On this page

Key takeaways

A personal loan has fixed payments over a set term, which makes it easy to budget
Compare total cost, not just the monthly payment
Think very carefully before securing a loan on your home
Be wary of advance fees, loan sharks and unauthorised lenders
If you are already struggling with debt, get free advice before taking out a loan

A personal loan lets you borrow a fixed amount and repay it with interest in regular instalments over an agreed period. It is one of the most common forms of borrowing in the UK, used for everything from car purchases and home improvements to consolidating other debts. This guide explains how personal loans work, how to compare them and when they are not a good idea.

How a personal loan works

You agree to borrow a set sum, for example £5,000, over a term of, say, three years. You then repay it in equal monthly instalments, each covering part of the capital and part of the interest. At the end of the term the loan is repaid in full. Most personal loans have a fixed interest rate, which means your payments stay the same and are easy to budget.

Unsecured and secured loans

Unsecured loans are not tied to any asset. If you cannot pay, the lender can take court action, but cannot take your home without a court order. Most personal loans are unsecured.
Secured loans are tied to an asset, usually your home. They may allow larger sums or be available when you have a poor credit history, but if you do not keep up payments your home may be at risk. Think very carefully before securing a loan on your home, particularly to repay unsecured debt.

Understanding the cost

APR

The APR includes interest and compulsory fees, and it helps you compare loans. For loans, the advertised "representative APR" must be available to at least 51% of those accepted, so the rate you are offered may be higher. The most important numbers to compare are the total amount repayable and the monthly payment.

Term

A longer term reduces the monthly payment but raises the total interest paid. A shorter term costs less overall but each payment is bigger. Our mortgage calculator shows this effect on larger loans, and the same principle applies to personal loans.

Fees

Check for arrangement fees, late payment charges and early repayment charges. Under consumer credit law, the charge for repaying early is capped, broadly at no more than one or two months' interest depending on how long is left on the loan, and some loans have no charge at all. Look at the pre-contract information before signing.

Where to borrow

Banks and building societies: often competitive, especially for existing customers
Credit unions: not-for-profit, member-owned lenders with capped interest rates; suitable for smaller loans
Online lenders and peer-to-peer platforms: may offer fast decisions, but check they are authorised by the Financial Conduct Authority
Community development finance institutions (CDFIs): may lend to people who cannot get credit elsewhere

Always check a lender is authorised on the FCA Register. Beware of loan sharks and of "advance fee" scams, where you are asked to pay money before receiving a loan. Legitimate lenders do not charge fees before they lend. The Illegal Money Lending Team can help if you are dealing with a loan shark.

How lenders decide

When you apply, the lender considers your credit history, your income and outgoings, your employment, and your existing debts. Before offering the loan the lender must carry out an affordability check. You may see:

A soft search from an eligibility checker, which does not affect your score
A hard search when you make a formal application, which is recorded on your credit report

Apply for the loan only when you are reasonably confident of being accepted. See our guide to credit scores.

Using a loan to consolidate debt

Debt consolidation means taking one loan to pay off several debts. It can make sense if the new loan has a lower interest rate and you stick to a repayment plan. However:

A longer term might lower your payments but increase the total cost
If you use a secured loan against your home, your home is at risk
If you run up the cleared credit cards again, you can end up in a worse position
Some firms charge high fees or advertise misleading offers

If you are struggling with debts, speak to a free adviser at StepChange, National Debtline or Citizens Advice before consolidating. Options like a debt management plan may be better. Also see how to pay off debt faster.

Your rights

Cooling-off period: you generally have 14 days from signing the agreement to withdraw, and you must repay the loan plus any daily interest.
Early repayment: you have the right to repay part or all of the loan early.
Protection if things go wrong: if you are struggling, the lender must treat you fairly and consider options like reduced payments.
Complaints: you can complain to the lender and then to the Financial Ombudsman Service.

Alternatives to consider

Saving up to buy what you need
A 0% purchase card for something you can pay off within the interest-free period
An arranged overdraft for very short-term borrowing (see overdrafts)
A credit union loan
Government schemes such as Budgeting Advances or Budgeting Loans if you are on certain benefits

Loans and your budget

Before you borrow, put the monthly payment into your budget and check that you can still cover essentials, bills and some savings. Many lenders will approve you for more than you can comfortably afford. A useful test is to ask whether you could keep up the payments for the full term if your income dropped or your costs rose. If the answer is no, borrow less, take a longer term or wait. Our guide to making a budget shows how.

Questions to ask before you sign

What is the total amount I will repay, not just the monthly figure?
Can I afford the payments if my income drops?
What are the fees for late or early payment?
Is this loan secured against my home?
Is the lender authorised by the FCA?

Frequently asked questions

Can I get a loan with bad credit?

Some lenders offer loans for people with poor credit, but they usually charge higher interest. Credit unions and CDFIs are worth trying first.

Will a loan affect my credit score?

Applying leaves a hard search, and the loan will appear on your report. Paying on time can help your record over time, while missed payments can harm it.

Can I repay a loan early?

Yes. You have the right to repay early, although you may have to pay a limited charge. Check your agreement.

What is the difference between a loan and a credit card?

A loan gives a fixed sum and fixed repayments over a set term. A credit card offers revolving credit up to a limit, and you choose how much to repay each month above the minimum.

Sources and further reading

Personal loans — MoneyHelper
Check if a firm is authorised — Financial Conduct Authority
Loan sharks — Illegal Money Lending Team
Borrowing and credit — Citizens Advice

This page provides general information only. It is not personalised financial, legal or tax advice, and rules and figures can change. Your situation is unique — please check official sources such as GOV.UK and MoneyHelper, and speak to a qualified, FCA-authorised adviser before making important decisions about your money.

Written by

MoneyBrink Editorial Team — Editorial team

The MoneyBrink Editorial Team researches, writes and reviews every guide on this site. We work from official UK sources such as GOV.UK, the Financial Conduct Authority, MoneyHelper and the Money and Pensions Service, explain things in plain English, and update articles when the rules change. We do not sell financial products and we do not give personal advice.

Read how we research and check our guides in our editorial policy.

personal loans borrowing credit scores

Personal Loans Explained: What to Know Before Borrowing