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    Everything you need to know abou...

Everything you need to know about personal loans

What is a personal loan?

Personal loans are commonly taken out by people looking to make a one-off essential purchase.

They are normally for smaller amounts than secured loans, but you won’t be required to secure the loan against your property.

How do personal loans work?

Personal loans are normally for amounts from about £1,000 up to £25,000, with repayment terms from one to seven years.

The amount you can borrow and the interest rate you’ll be offered will depend on:

When you take out a personal loan, the cash lump sum will be paid into your bank account. You’ll then repay it each month, plus interest, for the duration of the term. Some fees and charges may also apply.

Is a personal loan right for me?

A personal loan might be right for you if you want to:

  • borrow a relatively small sum of money

  • repay the money in fixed monthly repayments over 12 months to seven years

Personal loans are often advertised with low headline rates that can make them look very cheap — but you could be offered a higher rate if your credit score isn’t perfect. Make sure you get a quote from the lender before you apply.

Check your credit report

You should check your credit report before making an application for a personal loan.

If you see any incorrect information, you can raise a dispute by selecting the ‘Raise a dispute’ option against the appropriate section of your credit report.

What to watch out for

Is a personal loan different to a secured loan?

Yes, a personal loan is different to a secured loan.

With a secured loan, you’ll put something forward as security for the loan. This is usually your property. The lender can ultimately take possession of this asset if you don’t repay the loan.

With a personal loan, you are not required to offer anything as security for the money.

Personal loans also tend to be for shorter terms than unsecured loans, and for lower amounts.

What is a personal loan cooling-off period?

When you take out a personal loan you have a 14-day cooling-off period from either the date the loan agreement is signed or when you receive a copy of the agreement, whichever is later.

If you cancel during the cooling-off period, and you have already received the funds you have up to 30 days to repay the money in full.

However, you’ll be charged interest for the period you had the credit. But any additional fees you paid will be refunded.

What are early repayment penalties on a personal loan?

You might be charged early repayment penalties on your personal loan if you:

  • want to pay more off your loan each month than your set monthly payment

  • want to pay off the entire loan before the end of the term

Early repayment penalties normally amount to one or two months' interest. But some loan providers don't charge early repayment penalties at all. If you think you might be able to pay off your loan early, you should borrow from one of these providers.

Do personal loans have guaranteed rates?

Some personal loans have fixed or guaranteed interest rates. But some personal loans have variable interest rates, meaning they can go up or down.

If you want to know for sure how much you will need to repay each month you should opt for a loan with a fixed interest rate.

The interest rates on a personal loan may vary depending on how much you want to borrow. This is called a ‘tiered interest rate’ system. Typically, you'll be charged a higher interest rate for smaller loan amounts.

When you apply for a personal loan, you might not get the representative APR advertised. Legally, loan providers have to offer the advertised rate to 51% of people who apply for, and are accepted for, a loan.

So you might be offered a loan with a higher interest rate. This could be the case if your credit score is not ‘good’ or ‘excellent’.

Being rejected for a loan can make it harder to be accepted for credit in the future. So, when one lender says no, they often all do. TotallyMoney’s eligibility checker lets you know if you’ll be accepted — with no harm to your credit rating.

Do personal loans have arrangement fees?

Some personal loans come with arrangement fees. These will make a loan more expensive.

Arrangement fees will be included in the APR. This is why you should compare APRs instead of just interest rates when choosing a loan.

Shop around for the best deals

You should compare personal loan interest rates and terms from different lenders.

The interest rate on a personal loan may vary depending on:

  • how much you want to borrow

  • your credit rating

  • the term

  • the loan provider

The longer you have to pay back your personal loan, the lower your monthly payments will be. But a longer term means you’ll end up paying more interest overall.

But, repaying your loan over a shorter time period means larger monthly payments. So, it's important to work out what you can afford to pay each month.

It’s important to check that you can afford to repay any loan you take out. If you fail to make repayments it can affect your credit score.

What are my other options?

Other borrowing options include a:

  • secured loan

  • car loan

  • debt consolidation loan

  • guarantor loan

  • credit card

Secured loans

Secured loans are a type of credit where the debt is secured on something the borrower owns — normally a property.

If you don’t pay back the loan as agreed, the lender can take possession of the asset you have put down as security.

You can normally borrow larger amounts with a secured loan — up to £100,000 or more if you have enough equity in your property. Loan terms tend to be longer too, up to 25 years.

You can normally get a secured loan with a less than perfect credit record. But you’ll need a better credit score to get a personal loan.

Car loan

Some personal loans are for the specific purpose of buying a car.

These loans work in the same way as personal loans in that you borrow a lump sum of money and repay it in monthly instalments, plus interest.

Car loans generally aren’t secured on your car. However, other types of car finances such as personal contract purchase (PCP), hire purchase (HP) and personal contract hire (PCH) are secured on the car.

Debt consolidation loan

A debt consolidation loan involves taking out one loan to pay off several other debts such as overdrafts, payday loans, and credit cards. 

The idea is to find a debt consolidation loan with a lower interest rate than the average you are paying on your other debts.

Combining all your debts into one consolidation loan can reduce the overall rate you pay — and make things simpler too.

To consolidate your debts, you need to work out how much you owe on all your debts in total, and take out a loan for that exact amount. You then use the loan to pay off all your debts, then repay the debt consolidation loan by making monthly payments to just the one lender. It’s important to make sure you don’t use this as an opportunity to then take out more credit.

Guarantor loan

If you have a bad credit history, don’t own a property, and have been turned down for a personal loan, you might still be eligible for a guarantor loan.

The main difference between a guarantor loan and a personal loan is that the borrower has the support of a second person — the guarantor. The guarantor acts as a back-up to the loan and agrees to cover the debt if you default on repayments.

Credit card

If you want to borrow a relatively small amount, it’s usually cheaper to borrow on a credit card than take out a loan.

This is because APRs on loans are normally higher for small amounts than larger amounts. For example, if you take out a loan for £1,000, the interest rate will probably be higher than if the loan amount was £7,500.

Unlike loans, credit cards don’t have fixed repayments. You can pay back as much as you like each month as long as you make at least the minimum repayment. You should always try to make more than the minimum repayment though otherwise borrowing in this way can be very expensive.

If you think a credit card would be a better option, TotallyMoney has a credit card checking tool, to help find the best card for you. It shows you your likelihood of acceptance before you apply.

Pros and Cons of personal loans


  • you don’t need to own a property to be eligible

  • applications can be approved more quickly because the lender doesn’t need to check the value of your property

  • rates can be competitive, especially if you borrow more than £7,500

  • fixed payments make budgeting easier

  • terms are flexible, normally one to seven years


  • the amount you can borrow will be less than on a secured loan

  • the interest rates on loans for smaller amounts can be high

  • you need a good credit score to be eligible for the best deals

If you get behind with your repayments this will affect your credit score

As with all borrowing, make sure you only borrow what you can afford to pay back and think about repayments over the whole term of the loan. Always shop around for the best deal for you.

Check your loan deals

Find the loans you’re most likely to be accepted for. You could even be pre-approved.

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