What is a personal loan?

A guide to personal loans

A personal loan is a simple way to borrow money. A lender gives you a lump sum, which you pay back in regular instalments over a period of time, usually with interest on top. 

Personal loans are also known as unsecured loans as they don't require to be fixed to an asset.

How does a personal loan work?

Applying for and managing a personal loan should be straightforward. It starts with a one-off cost that you’d struggle to afford all at once. A loft conversion or a new car, for example. After researching different options and successfully applying, your lender will give you a lump sum to spend.

You’ll pay back what you’ve borrowed, plus interest, in instalments over a specific period. 


Personal loan features

  • Interest - Lenders will provide an interest rate before you sign up for a personal loan. This includes both the interest rate and any set up fees, called the Annual Percentage Rate (APR).
  • Repayments - Choose your repayment term depending on the amount borrowed, purpose and interest rate. Do make sure the monthly amount is affordable for you.
  • Terms and conditions - Each provider will have different rules to bear in mind. 
  • Additional fees - Along with the APR, you may want to research any upfront fees or early repayment charges.


Different types of personal loans

Loans come in a range of shapes and sizes. Here are some key things to consider during a personal loan comparison:


Unsecured vs secured loans

When exploring your options, you’ll see that most personal loans are ‘unsecured’. It simply means no assets, like your house or car, are tied to the loan. You’re still obliged to pay back the borrowing and failure to do so could impact your credit file (and impact your ability to obtain other credit), plus result in legal action by the lender to recover the debt, plus costs.

Some personal loans are advertised as 'secured' instead. These could offer larger borrowing amounts, above £10,000. They may have lower interest rates too. But in exchange, you’ll need to put an asset up as security. This could be taken away if you struggle to keep up with repayments.  View our guide if you are struggling financially. 

Fixed vs variable interest

You’ll usually see ‘fixed’ interest rates advertised in personal loan comparison tables. With a fixed loan, your interest won’t rise or fall during the repayment term. So you’ll know exactly what you need to pay each month.

On the other hand, lenders sometimes offer ‘variable’ rates instead. In these cases, your interest rate – and so your payments – could change.


What could you use a personal loan for?

How to apply for a personal loan

Personal loan applications may vary between lenders. But here are some common steps to follow:

  1. How much should you borrow - Working out what you need the loan for and how much you could afford to borrow is the first step.
  2. Make a personal loan comparison - Shopping around should give you a clear idea of the loan sizes and interest rates available.
  3. Commitment free soft check  - Lenders may usually give you an indication of what you could borrow and your interest rate before you apply, without impacting your credit score.
  4. Gather essential details - You’ll need information about your income, employment and existing debts for starters.
  5. Start a formal application - Depending on the lender, you might have the option to apply online, in person or by phone. Carefully follow each step, providing any details you’re asked for.
  6. Your decision - In most cases, the lender may give an instant decision taking into consideration what you tell them, what they know about you and information from credit bureaus. Sometimes you may be asked for more information.
  7. Accept the loan terms - If successful, you’ll be asked to confirm you’re happy with the interest rate and repayment terms.

For more please check out our guide on applying for a loan.

Personal loan FAQs