What is a personal loan?
Personal loans give you the flexibility to borrow a fixed amount and repay it in manageable monthly instalments over a chosen term. Whether you’re covering a larger expense or looking to simplify existing debts, a personal loan might be for you.
Estimated read time: 6 mins
What’s in this article:
How does a personal loan work?
What are the key features of a personal loan?
What are the different types of personal loans?
What can you use a personal loan for?
What are the pros and cons of a personal loan?
Our credit risk expert says…
What are the alternatives to personal loans?
Personal loan eligibility requirements
What to consider before taking out a personal loan
Applying for a personal loan if you have bad credit
Applying for a personal loan if you are self-employed
Personal loan FAQs
How does a personal loan work?
A personal loan allows you to borrow a lump sum of money, which is usually paid into your bank account. You repay this amount over a fixed period through regular monthly payments, helping you to spread the cost over months or years.
Most personal loans have a fixed interest rate, meaning your repayments stay the same for the entire term. When you take out a loan, you’ll need to pay interest on top of the amount you borrowed. This is a percentage of the original loan. It’s the cost of borrowing, so you’ll pay back more than you originally got.
But loan terms and repayment periods can vary by lender, so it’s important to compare options and pick one that fits your personal situation.
What are the key features of a personal loan?
- Interest: Personal loans charge interest on the amount borrowed, usually at a fixed rate. This means repayments stay the same for the duration of the loan.
- Additional fees: Some loans may include fees such as early repayment charges or late payment fees. Not all personal loans have extra fees, so it’s important to check before agreeing.
- Terms and conditions: The terms specify how long the loan lasts, how repayments are made, and what happens if you miss a payment. These conditions form the legal agreement between the lender and borrower.
- Fixed repayment terms: The loan is repaid in regular instalments, usually monthly, over an agreed period. Each repayment covers both the loan amount and the interest.
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What are the different types of personal loans?
Unsecured vs secured loans
A personal loan can be either secured or unsecured.
With a secured loan, you need to provide collateral – an asset of similar value to the amount you’re borrowing. For example, when buying a car with a secured loan, the vehicle itself is used as security. If you’re unable to keep up with repayments, the lender may repossess the asset to recover the money owed.
Unsecured personal loans don’t need collateral. People often use them for unexpected expenses or to consolidate debts.
Missed or late repayments on your loan can damage your credit score. The lender can also take action to recover the unpaid balance, plus any interest and fees owed.
Fixed vs variable interest
Fixed and variable interest rates determine how much you pay to borrow money over time. With a fixed interest rate, your rate and monthly payments stay the same throughout the loan. This makes budgeting easier. A variable interest rate can increase or decrease based on market changes. This means your repayments may vary over time. This could help you save money or end up costing you more.
Personal loans usually tend to be based on a fixed interest rate, but not always.
What can you use a personal loan for?
Personal loans can be used for a wide range of purposes. Unlike a mortgage or car finance, they’re not tied to a specific purchase, so you can use the money for things like home improvements or consolidating debts. But there may be restrictions, so it’s important to check what your lender allows. Some of the most common uses of a personal loan are:
- Home improvements: A new kitchen or furniture, for example
- Emergency expenses: This could be car repairs or a new boiler
- Debt consolidation: For example, paying off other borrowing to reduce interest payments
What are the pros and cons of a personal loan?
Pros
Usually, you’ll have fixed monthly repayments which helps you manage your budget more easily.
Most personal loans have a fixed interest rate, so your repayments won’t change over the loan term.
A set loan term means you know when the loan will be fully repaid.
Interest rates may be lower than other borrowing options, like credit cards or overdrafts.
Personal loans can be used for many things, like debt consolidation.
Cons
Interest is charged on the amount borrowed, increasing the total amount you repay.
You’re agreeing to repayments for the full loan term, which could last several years.
Some loans may have extra charges. These can include fees for missed payments or for paying off the loan early.
Missing repayments can negatively impact your credit score and limit future borrowing options.
Approval and interest rates depend on your credit history and financial circumstances.
Good to know:
- Personal loans may not be suitable for everyone
- Check you can manage the repayments now and in the future, as your situation may change
- If you’re not sure a personal loan is right for you, think about getting independent financial advice
Our credit risk expert says...
“Before taking out a loan, it’s important to slow down and think about how it fits into your wider finances. Understanding the commitment and checking affordability early on can help you make a more informed, confident decision.”
Riccardo Coppola, Head of Credit Risk Strategies.
What are the alternatives to personal loans?
If you need to borrow money, an unsecured personal loan isn’t always the only option. Always think about your own situation and why you need the loan. Other options include:
Credit cards: If you’re worried about strict monthly loan payments, credit cards might give you more flexibility. You can pay more or less each month based on your situation, as long as you meet the minimum repayment.
Overdrafts: An overdraft can help with short-term borrowing, allowing you to use extra funds when your balance is low. Just remember, an unarranged overdraft can come with extra fees and usually has high interest rates.
Personal loan eligibility requirements
Before you apply for a personal loan, you’ll need to make sure you meet the lender’s eligibility criteria. Eligibility can vary by lender, but you usually need to meet these requirements:
- You must be at least 18 years old
- You must be a UK resident
- You are not legally restricted from getting credit e.g. because of bankruptcy
- Your income meets the lender’s requirements
Before approving a loan, lenders check that you’ll be able to manage the repayments alongside your current financial commitments.
If you’re eligible to apply, lenders generally take some extra info, like how much money you bring in and spend each month, as well as details of any dependants. They use this extra info alongside a full credit check when deciding on your application.
How to apply for a loan
The application can vary from lender to lender. Here’s a common example of how it works through our partner, ClearScore if they find you a loan through their panel of providers.
Compare loans and check your eligibility through ClearScore
Fill in some basic details, including info about the loan you want and your income.
ClearScore will search its panel of trusted loan providers and show you offers you might qualify for.
This takes less than 2 minutes and won’t affect your credit score.
Apply for your loan
If you find a suitable loan, you’ll complete a full application with more detail about you and your finances.
The lender will review your application and carry out a hard credit search.
Receive your money
If you’re approved, you’ll confirm where to send the money, provide any final info and sign your loan agreement.
You should receive the funds to your bank account the same day.
Representative 48.7% APR.
Vanquis Bank acts as a credit broker, not a lender, introducing customers to our partner ClearScore. ClearScore acts as a credit broker and not as a lender. If you take out a loan, Vanquis Bank and ClearScore receive a commission payment from your lender. If you’d like further information about the commission Vanquis Bank or ClearScore receive as a result of your loan, please contact us. We will not charge you a fee for our services. Loans can only be offered to customers aged 18 or over. Credit is subject to status. Terms and conditions apply.
What to consider before taking out a personal loan
Before applying, think about how much you can afford to borrow and repay each month. If you miss repayments, it could affect your credit score, and your lender may need to recover the amount owed. You should consider the total cost of the loan, including interest and any fees, and whether it’s the right option for you.
Applying for a personal loan if you have bad credit
If you have bad credit or little credit history, you may still be able to apply for a personal loan. Some lenders can help customers who were turned down before or are new to credit. But this will depend on your individual situation.
Before applying, it’s a good idea to use an eligibility checker. This won’t impact your credit score and will show if lenders might accept you.
If the eligibility check suggests you won’t be accepted, you won’t be able to go ahead with a full application. But this means you avoid unnecessary ‘hard’ credit searches, which can affect your credit score. If you do go on to apply, the lender will carry out a full credit check, including a hard credit search.
Applying for a personal loan if you’re self-employed
While self-employed people can apply for a loan, decisions depend on the individual lender, so criteria can differ between them. Self-employed applicants might need to give extra info, like proof of income.
Personal loans FAQs
Will applying for a personal loan affect my credit rating?
Applying for a personal loan can affect your credit rating. But when and how it affects your score depends on the type of check carried out.
- Soft credit checks (such as eligibility checks) do not affect your credit score. These checks help you see if you might get accepted, and they won’t leave a record for other lenders.
- Hard credit checks are carried out when you submit a full loan application. These are recorded on your credit file and could impact your score, especially if you apply several times in a short period.
Your credit score is only at risk once a hard check is carried out, which is why it’s a good idea to use an eligibility check before applying. This helps you understand your chances of approval and avoid unnecessary applications.
What happens if I miss a personal loan repayment?
A missed payment is usually recorded on your credit file and can have a negative impact on your credit score. If you miss repayments often, your account might go into arrears or default. This can impact your credit score and lead the lender to take action to recover the debt.
Remember, support is available. If you’re struggling to keep up with repayments, it’s always better to contact your lender as soon as possible. Reaching out early can make a big difference and may help limit the impact on your finances and credit score Many organisations can give you free, unbiased advice and support if you’re facing financial difficulties. You can find more info about these organisations via our support page.
What happens if I can’t repay my personal loan?
If you can’t repay your personal loan, it’s important to contact your lender as soon as possible. Getting in touch early means the lender can look at your situation and discuss options that may help you manage your repayments.
If you ignore this or keep missing repayments, your account might go into default. Then, debt recovery action could start. This could result in a County Court Judgment on your credit file. This may damage your credit score and make it harder to get credit. It will also stay on your credit report for six years.
Can I repay a loan early?
Each lender has different rules for this. If you take out a loan, the fees and rules for paying it back early will depend on the lender and the offer. You’ll see all key details, including any fees, clearly upfront before you proceed.
How much can I borrow, and for how long for?
If you find a loan when you search through our partner ClearScore, you can borrow up to £25,000, depending on your eligibility and the lender. Repayment terms are flexible, and you can choose options of up to five years. This lets you pick a loan length that fits your budget and monthly payments. The exact amount you can borrow, and the loan term will depend on your situation and eligibility checks.
Do the monthly repayments change?
Most personal loans – including the ones you can compare through our partner ClearScore loans have a fixed rate. This means your monthly Direct Debit will remain the same throughout your loan term.
This makes it easier to budget, as you’ll always know exactly how much is going out each month and when. Your repayments won’t change unexpectedly, so you can stay in control of your finances. You’ll see your monthly repayment amount clearly before you apply, so there are no surprises.
Can a guarantor help me secure a loan?
Yes, some lenders do offer personal loans without a guarantor. When you explore loans, you’ll be able to see whether you need a guarantor before applying.
What is APR (Annual Percentage Rate)?
APR stands for Annual Percentage Rate and shows the total yearly cost of borrowing money. APRs can change based on the product, the lender, and your situation. So, it’s crucial to know the rate offered before you agree to any finance.
APRs are shown as a percentage to make it easier to compare different borrowing options. They affect how much you’ll repay across the agreed term, as the APR reflects the total cost of credit. This includes the interest rate and any extra fees or charges applied by the lender.
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