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How do personal loans work?

When you take out a personal loan, the money is deposited into your bank account as a lump sum. It can help you buy a new car, pay for renovations to your home, and even pay off high-interest debts.

But before taking out a personal loan, get to know how they work and what the charges are. This way you can make sure it’s the right option for you and avoid any unexpected costs down the line.

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

5 things to consider before taking out a personal loan

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

  1. The minimum personal loan amount is usually £1,000.
  2. Personal loans might have higher interest rates compared to other borrowing options.
  3. 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.
  4. Whenever you take on debt there’s an element of risk. Will you be able to meet your repayments? If your financial situation were to change, would you still be able to comfortably meet your repayments?
  5. If you miss repayments or default on your personal loan, it may impact your credit score and your ability to borrow in the future.

Personal loan fees

Arrangement fee

This is an administration fee some lenders charge 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.

Personal loan repayment agreements

When you take out a personal loan, 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 amount per month.

Explore: What to check before applying for a loan

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 likely you are to be approved for a loan and receive a lower interest rate.

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