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How do personal loans work?

A personal loan can help you pay for renovations to your home, cover school fees and even pay off high-interest debts.

But before taking out a personal loan, it’s worth taking some time to understand how they work and what the charges are. This way you’ll be able to ensure it’s the right option for you and can avoid any unexpected costs down the line.

How does a personal loan work?

Here are some of the key elements of a personal loan:

  • you can usually borrow between £1,000 to £25,000

  • loan repayments are usually fixed and monthly, this can help with budgeting

  • you can spread your repayments over one to eight years, but the longer you take to pay back your loan, the more interest you'll have to pay

  • you can consolidate existing debts into one personal loan, so you only have one set of repayments

What to look out for

Here are some of the key things to consider before taking out a personal loan:

  • the minimum personal loan amount is usually £1,000

  • personal loans might have higher interest rates compared to other types of lending

  • the interest rate advertised isn’t necessarily the one you’ll receive, as this will be based on your loan amount, loan term and also your credit history

  • any time you take on debt there is an element of risk. Will you be able to meet your repayments? If your financial situation was to change, would you still be able to comfortably meet your repayments?

  • if you miss repayments or default on your personal loan it may impact your credit score, this can impact your ability to borrow in the future

Personal loan fees

Arrangement fee – this is an administration fee that is charged by some lenders for arranging your personal loan.

Late repayment fees – if you miss a repayment under your loan agreement, you may be charged interest on the overdue amount, as well as any administration fees from the lender.

Early repayment charge – some lenders may charge a fee if you pay back more than your fixed monthly repayment amount.

Repayment schedules

When you take out a personal loan, you must factor in the total loan costs – the amount borrowed plus interest accrued over the repayment period.

Your loan agreement will detail how much you have to pay back and when. This is usually a fixed minimum fee per month.

How much can you borrow?

The amount you can borrow on a personal loan depends on your needs, income and credit score. The better your credit score, the more chance you have of being approved for a loan and receiving a lower interest rate.

Use our personal loan calculator to see what the monthly repayments could be on your loan.