Quick guide to personal loans

With a personal loan, you borrow a fixed amount and pay back the money in instalments over a set period of time, usually between three and ten years.

Personal loans can offer the opportunity to borrow more money than would be available using a credit card, sometimes as much as £25,000. Interest rates are also usually lower than they would be with a credit card, although they do vary.

Also known as unsecured loans, personal loans are not backed by an asset like your home or your car.

How do personal loan repayments work?

If you choose a fixed rate loan, the rate of interest you pay will stay the same over the period of the loan, making it easier for you to budget. If you chose a variable rate loan the interest rate may fluctuate.

You can choose how long you’d like to take to repay the loan, and in some cases make overpayments or repay the loan in full before the end of the agreement without penalty, but you need to check this is available on any loans you look at.

When might a bank loan be suitable?

Personal loans can be useful when you want to borrow a relatively large amount and have a while to pay it back. A credit card might be better for short-term borrowing. 

You might consider a personal loan to spread the cost of a big purchase like buying a car, paying for a wedding or for home improvements like getting a new kitchen or bathroom.

Personal loans can also be used to consolidate existing debts into one monthly repayment. This can be convenient in terms of having only one monthly payment to deal with, but bear in mind that extending your debt could mean you end up paying more interest.

How should you choose a personal loan?

Each loan is advertised with a representative Annual Percentage Rate (APR). This includes the interest rate, and any arrangement and other standard fees.

You can use this to compare the cost of loans, but be aware that the representative APR advertised isn’t necessarily the interest rate you’ll get. The representative APR has to be available to at least 51 per cent of successful applicants, but the interest rate you get will depend on your personal financial circumstances, including your credit history.

Deciding how much to borrow

When you apply for a personal loan, you’ll need to have a good understanding of the costs you need to meet. For example, if it’s a dream kitchen, it will be helpful if you’ve priced up the materials and work involved and have a budget for the entire project.

Once you’ve figured out how much you need, it’s time to look at how much you can afford to pay back each month. Taking the loan out over a longer period will give you a lower interest rate and reduce your monthly repayments, but you may pay more in interest over the full term of the loan. Use a loan calculator to look at different scenarios and decide how much is right for you.

Explore more: How to create a budget

How do you apply for a personal loan?

With HSBC, you can apply for a loan online, over the phone, in a branch or even through the mobile app.

HSBC current account holders will get an instant answer and new customers will be contacted in two to five working days.