Personal loans

A personal loan is a lump sum you borrow from a bank, building society or another lender. They’re sometimes referred to as unsecured loans because you don’t need to use an asset – such as your car or home – as security.

You repay the loan - plus interest - over a set period, usually in monthly instalments. The interest is worked out as a percentage of the amount you borrow. The longer you take to pay back the loan, the more interest you’ll be charged.

Personal loans are generally set up to be paid back over one to five years.

Before committing to any kind of borrowing, it’s important to weigh up the advantages and disadvantages.

Pros of personal loans

• You get a lump sum of money upfront.
• There are usually different repayment term options. Opting for a longer repayment term will mean you pay more interest.
• There’s a fixed term to clear the debt, unlike some other types of borrowing e.g. credit cards.
• Most personal loans come with a fixed interest rate and set monthly payments, making it easier to budget.

Cons of personal loans

• Lenders charge interest so you’ll repay more than you borrow.
• You may not know the exact interest rate until you apply.
• The minimum amount you can borrow is usually at least £1,000. This may encourage you to borrow more than you need.
• It’s often the case that the more you borrow, the lower the interest rate. Again, this may tempt you to borrow more than you need.

There are some things to bear in mind before applying for a personal loan.

Credit check

Most lenders conduct a ‘hard search’ on your credit file when you apply for a personal loan. Too many hard credit checks in a short period can affect your credit score, so only apply if you’re confident your application will be approved.

An eligibility checker uses a ‘soft search’ to see if you’re likely to be approved for a loan without impacting your credit score. You’ll find eligibility checkers on price comparison and some lenders’ websites.

Advertised interest rates

Not everyone gets the advertised interest rate or better.

This means you might face higher monthly repayments than expected and you won’t usually find out until after you’ve applied.

An eligibility checker might show interest rates tailored to you, so it’s a good idea to use one before applying.

Advertised interest rates

Not everyone gets the advertised interest rate or better.

This means you might face higher monthly repayments than expected and you won’t usually find out until after you’ve applied.

An eligibility checker might show interest rates tailored to you, so it’s a good idea to use one before applying. 

Variable rates

Some personal loans have variable interest rates. This can make it harder to budget as your monthly repayments are subject to change.

Think twice before signing on the dotted line for a loan with a variable interest rate if you can only just afford the initial repayments. Otherwise, you could get into financial difficulty if the rate goes up.

Arrangement fees

Some lenders charge an administration fee for setting up a loan. Make sure you take all costs into account when choosing a loan.

Early repayment charge

If you’d like the option to pay off your loan early, check whether you’ll be penalised for doing this before you apply. Some personal loans have an early repayment charge.

Be wary of scams

Signs of a scam include being: 

• asked to pay a fee before you’re offered a loan
• rushed into paying fees
• asked to pay a fee by bank transfer, with vouchers or by another unusual method

If you have any doubts about the legitimacy of a company offering a loan, check they’re on the Financial Services Register. 

Find out what your rights are and what to do if you need help after taking out a loan.

Cooling-off period

You have 14 days after signing a loan agreement to change your mind.

If you cancel, you’ll have 30 days to repay the money. You can be charged interest for the time you had the money but any other fees must be refunded.

Struggling to repay your loan?

Tell your lender as soon as possible if you’re struggling to keep up with your payments. They have a responsibility to help you find a way to pay back what you owe.

If you’ve fallen behind with your payments, they must offer support to help you get back on track. They have to do this before taking you to court.

Ways they may be able to help include: 

• pausing interest and charges
• granting you a payment holiday
• agreeing an affordable payment plan for your outstanding balance and arrears

Your lender should give you time to consider your options. Use that time to get debt advice.