What Is A Personal Loan? | How Personal Loans Work

A personal loan allows you to borrow a fixed amount of money as a lump sum, which you pay back in monthly instalments.

Here, we look at:

Things to consider before taking out a personal loan

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How do personal loans work?

Personal loans can be useful when you want to borrow a relatively large amount and would like more time to pay it back. For example, a personal loan can help you:

When you take out a personal loan, the money is deposited into your bank account as a lump sum, which you pay back each month over a set period – usually between 3 and 10 years.

While secured loans, like mortgages, are fixed to an asset – typically the home itself – personal loans are not, which is why they’re also known as unsecured loans.

There are 2 main loan types:

Fixed-rate loans: the interest rate stays the same throughout the loan
Variable-rate loans: the interest rate may fluctuate, which means your repayments could go up or down

In some cases, you can make overpayments or repay the loan in full before the end of the agreement without penalty. If this is something you'll want to do, check there are no early repayment charges on any loans you look at.

Key features of a personal loan

You can usually borrow between £1,000 to £25,000
Loan repayments are usually monthly at a fixed amount – this can help with budgeting
You can spread your repayments over 1 to 8 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 1 personal loan, so you only have 1 set of repayments

Things to consider before taking out a personal loan

Check the terms and conditions carefully and factor in the total loan costs – the amount borrowed plus interest accrued over the repayment period, as well as any fees.
Personal loans might have higher interest rates compared to other borrowing options.
The interest rate advertised isn’t necessarily the one you’ll receive. It’ll be based on your loan amount, loan term, and your credit history.
Whenever you take on debt, there’s an element of risk. If your financial situation were to change, would you still be able to meet your repayments?
If you miss repayments or default on your loan, you may be charged interest on the overdue amount plus any administration fees from the lender. It could also impact your credit score and your ability to borrow in the future.

Explore: How to manage your loan repayments