Personal Loans

How a personal loan works

With a personal loan you agree to borrow a set amount — say £5,000 — and repay it, with interest, in fixed monthly payments over a term such as three or five years. Because the payment is usually fixed, you know from the outset what you will pay each month and when the loan will be cleared.

A longer term lowers the monthly payment but means you pay more interest overall. A shorter term costs less in total but demands higher monthly payments.

Secured versus unsecured loans

An unsecured loan is not linked to any of your possessions; the lender relies on your agreement to repay. A secured loan is tied to an asset — most often your home — which the lender can take steps to repossess if you do not keep up repayments.

• Unsecured personal loans are the most common form of standalone borrowing
• Secured loans (sometimes called homeowner loans or second charges) can offer larger sums but put the asset at risk
• Never treat a secured loan as a like-for-like swap for unsecured debt without understanding what you are putting up as security

What the advertised rate really means

Loans are advertised with a representative APR. This is the rate the lender must offer to at least 51% of the people it accepts — which means up to 49% could be offered a higher rate, and the amount you borrow can change the rate too. The rate and limit you are actually offered depend on your own circumstances and the lender’s assessment.

Repaying a loan early

You have a right to repay a regulated loan early, in full or in part, at any time. When you settle in full the lender must reduce the total interest you owe, but it can add a limited early-settlement charge — generally up to 28 days’ interest, or up to around 58 days’ interest on loans with a term of more than a year.

Ask the lender for a “settlement figure”, which sets out exactly what you would pay to clear the loan on a given date. Clearing a loan early usually saves interest overall; compare the settlement figure with your outstanding balance so you can see what, if anything, the early-settlement charge adds. A loan repayment calculator can help you work out the total cost.

Before you borrow

Check the total amount repayable, not just the monthly figure, and whether there is a fee to repay early. Only borrow from a lender authorised by the FCA — you can confirm this on the FCA Register. This is general information rather than regulated advice; if you are unsure whether borrowing is right for you, a free service such as MoneyHelper can help.