What is a Personal Loan and Is It Right for You? A Plain-English Guide
Published 6th of August 2012·Updated 13 April 2026
Reviewed by: Reviewed for accuracy April 2026
A personal loan is an unsecured loan where you borrow a fixed sum and repay it in fixed monthly instalments over an agreed term, typically one to seven years. The interest rate is usually fixed for the life of the loan, so your payments stay the same every month. Most high-street lenders including Barclays, HSBC, NatWest and Halifax offer personal loans up to £25,000 for creditworthy applicants.
Short Summary
Personal loans are best suited to specific, planned purchases where you know the total cost upfront, such as a car, home improvements, or consolidating existing debt.
The key figure to compare between lenders is the Annual Percentage Rate (APR), which includes all fees and reflects the true cost of borrowing.
Your credit score determines the rate you are offered. The headline rate advertised by lenders must be offered to at least 51 per cent of approved applicants, but you may be offered a higher rate.
If you only need money for a short period (under 12 months), a 0 per cent purchase credit card is often cheaper than a personal loan.
How does a personal loan work?
You apply to a lender for a specific amount over a specific term. If approved, the lender pays the money into your bank account. You repay the loan plus interest in equal monthly instalments by direct debit. At the end of the term, the loan is fully repaid and the account is closed.
The loan is unsecured, which means it is not tied to any asset. If you fail to repay, the lender cannot automatically seize your property. However, they can take legal action to recover the debt, which can result in a County Court Judgement (CCJ) that damages your credit file for six years.
What can you use a personal loan for?
Personal loans are flexible and can be used for a wide range of purposes. Common uses include:
- Buying a car (though a hire purchase agreement may offer better terms for vehicles)
- Home improvements
- Consolidating several credit card or overdraft debts into one payment
- Paying for a wedding or holiday
- Covering an emergency cost that cannot wait
They are not suitable for very short-term borrowing. If you need money for less than six months and have a good credit score, a 0 per cent purchase credit card from a provider such as MBNA, Barclaycard or Halifax is typically cheaper.
What loan term should you choose?
The loan term determines your monthly payment and the total interest you pay. A shorter term means higher monthly payments but less total interest. A longer term means lower monthly payments but more interest paid overall.
| Loan amount | Term | Approximate monthly payment (at 7% APR) | Total repayable |
|---|---|---|---|
| £5,000 | 2 years | £224 | £5,376 |
| £5,000 | 3 years | £154 | £5,554 |
| £5,000 | 5 years | £99 | £5,940 |
| £10,000 | 3 years | £309 | £11,109 |
| £10,000 | 5 years | £198 | £11,881 |
Figures are illustrative. Actual rates depend on your credit score and the lender.
Choose the shortest term where the monthly payment is genuinely affordable. Do not choose a longer term simply because the monthly payment looks smaller; you will pay significantly more in total.
What APR can you expect?
The APR you are offered depends on your credit score, income, and the loan amount. Lenders are required by the FCA to offer the advertised representative APR to at least 51 per cent of successful applicants. If your credit score is below average, you may be offered a higher rate than advertised.
As a rough guide (rates will vary by lender and market conditions):
| Credit profile | Typical APR range |
|---|---|
| Excellent credit | 3% to 8% |
| Good credit | 8% to 15% |
| Fair credit | 15% to 30% |
| Poor credit | 30% or above |
Use an eligibility checker on a comparison site such as MoneySuperMarket or Compare the Market before applying formally. These tools use a soft credit search that does not affect your credit score and show you the rate you are likely to be offered.
What are the main lenders for personal loans?
Most high-street banks and building societies offer personal loans. Online lenders and specialist providers can sometimes offer lower rates, particularly for mid-range loan amounts.
- High-street banks: Barclays, HSBC, NatWest, Lloyds, Halifax
- Building societies: Nationwide, Yorkshire Building Society
- Online lenders: Zopa, Sainsbury's Bank, M&S Bank
- Specialist providers: Shawbrook Bank, Hitachi Capital
Compare at least three or four lenders. The cheapest rate for a £5,000 loan may come from a different provider than the cheapest for a £15,000 loan.
Can you pay off a personal loan early?
Yes, but you may face an early repayment charge (ERC). Lenders are permitted to charge up to two months' interest as an ERC if you repay early. Some lenders, including Zopa and certain online providers, charge no ERC at all. Check this before applying if you think you may want to repay early.
Making overpayments partway through the loan can reduce the total interest you pay. Contact your lender to confirm how overpayments are applied; they should reduce the outstanding balance and therefore reduce future interest.
FAQ
What is the difference between a secured loan and a personal loan?
A personal loan is unsecured, meaning it is not tied to an asset. A secured loan (sometimes called a homeowner loan) is secured against your property. Secured loans typically offer higher borrowing limits and lower rates but carry the risk of losing your home if you default. For most borrowing needs under £25,000, a personal loan is sufficient and carries lower risk.
Does applying for a personal loan affect my credit score?
A formal application triggers a hard credit search, which temporarily reduces your score by a small amount, typically a few points. Multiple hard searches in a short period have a more significant negative effect. Use soft-search eligibility checkers to compare your options before committing to a full application.
How long does it take to get a personal loan?
Many online lenders can pay the money into your account the same day or the next working day if your application is approved. High-street banks typically take two to five working days. For larger amounts, lenders may request additional documents such as payslips or bank statements, which can extend the process.
Can I get a personal loan with bad credit?
Yes, but options are limited and rates are higher. Specialist lenders do offer personal loans to people with a poor credit history, but APRs can exceed 40 per cent. At that rate, borrowing is expensive and you should consider whether it is the right solution. If you are struggling with existing debt, a free debt adviser from StepChange or Citizens Advice may identify a better option.
Is a personal loan better than a credit card for large purchases?
For large purchases you plan to repay over more than 12 months, a personal loan is usually cheaper. A credit card charges interest from the end of the 0 per cent promotional period, which is typically 12 to 24 months. If you can clear the balance within a 0 per cent promotional window, the card is free. If you cannot, a personal loan at a fixed rate is more predictable and usually less expensive.