What are personal loans?

A personal loan is a lump sum of money you borrow from a lender and pay back, usually with interest, over a set period of time. Personal loans are available from banks and other lenders and aren’t secured against any asset such as your car or home. They’re also known as unsecured loans.

Although you’ll pay interest on the amount you borrow, monthly repayments are fixed to clear the debt at the end of the term – which is usually one to five years.

A loan is just one way to borrow money.

Here are some things to be aware of before choosing a personal loan.

Banks and other lenders use your credit record to find out about your borrowing history by running credit checks. This shows them how well you’ve managed credit in the past, for example, if you’ve ever missed a credit card repayment or energy bill payment.

This information is used to work out how risky you are to lend to and usually affects the interest rate you’ll get and how much they’ll offer you. They might also decide not to lend to you at all.

Before applying, which is recorded on your credit record, you can use an eligibility checker to see your chances of acceptance – most lenders and comparison sites have them on their sites. These use a ‘soft search credit check’, so you’ll see if it’s worth applying without leaving a mark on your credit file.  

When looking for a loan, many lenders will use a representative APR (annual percentage rate). However, only 51% of people approved for a loan have to get this rate or better – if that’s not you, you’ll pay more – and you usually won’t know until after you’ve applied.

Using an eligibility checker on a comparison site or direct with the lender will show you how likely you are to be accepted, and you might even see some guaranteed rates that are personal to you.

Some personal loans have variable interest rates, which means they can go up or down. If you’re only just able to afford the initial repayments, it’s best to avoid this type of loan in case the interest rate goes up.

Any arrangement fees will be included in the APR, which is why it’s important to compare APRs rather than just interest rates. Look out for these as they’ll make a loan more expensive. Make sure you include them when you work out how much the loan is going to cost you.

If you’re already struggling to pay your bills or repay other money you’ve borrowed, it’s important not to take on a personal loan.

Find out how to create a repayment plan for your borrowing.

Here are some tips to help find the right personal loan for you:

• Make sure your credit file doesn’t contain any errors. See our guide How to improve your credit score for what to look for and how to check your reports for free.
  
• Use an eligibility checker to compare loans, and see which lenders are likely to accept you. No site will scan all lenders, and some have exclusive deals, so it’s best to combine a few. ClearscoreOpens in a new window, ExperianOpens in a new window and MoneySavingExpertOpens in a new window all have eligibility checkers you can try.
• Double check you can afford the repayments before deciding to borrow.
• If you choose to apply, check your application carefully as any errors could affect if you’re approved.

You’ll get 14 days from either the date the loan agreement is signed or when you receive a copy of the agreement (whichever is later) to cancel. This cooling-off period applies to all credit agreements made in person, online or over the phone.

If you cancel, you have up to 30 days to repay the money. You might be charged interest for the period you had the credit, but any extra fees must be refunded.

Loan providers must allow you to pay back a personal loan in full before the end of the loan term or make partial overpayments. If you have savings, it almost always makes sense to use these to pay off any loans.

However, if you’re paying back more than £8,000 a year, you’ll usually have to pay an early repayment charge (ERC). This can vary but is typically equal to around one or two months’ worth of interest – you can find this information in your loan agreement. 

If there’s more than a year on your loan agreement to go, the maximum ERC would be 1% of the amount being repaid early or 0.5% if you’re in the final year.

If you want to repay your loan in full, ask your lender for a ‘settlement statement’. This will show how much you need to pay to clear the debt, and how much you’ll save by repaying early.

Find out how to create a repayment plan for your borrowing.

A loan company will never ask you for an upfront payment before they give you the loan. If you think you’ve been approached by a scammer or unauthorised firm, report it to the FCAOpens in a new window

If you have been scammed and want help to see if you might be able to get your money back, call our financial crimes and scams unit on 0800 015 4402.

If you’re unhappy or something has gone wrong, complain to your lender. It’s free and easy to do, just remember to keep a record of all the communication you have. 

Here are the steps to follow: 

1. ask your bank’s customer services to put things right – if you can’t agree on a resolution, then 
2. make a formal complaint – they have eight weeks to investigate and give a final response. If you still don’t agree, or the timeframe has passed, you can  
3. take your complaint to the free Financial Ombudsman ServiceOpens in a new window – you’ll get an independent decision on whether your bank’s response was fair or if they need to do more. 

For more information, see our full guides:

• How to complain to your bank, lender or card provider 
• Claiming compensation if you’ve been mis-sold