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A Beginners Guide to Personal Loans in the UK

Everything you need to know about borrowing money
Alex Hamilton is a regular contributor to numerous news sites.
Alex Hamilton is a regular contributor to numerous news sites.

There are lots of reasons why people decide to borrow cash. Some want [or need] to replace their car, others are looking to revamp their home – perhaps with a new kitchen or bathroom, and some may need a cash sum to launch a new business or book a much needed holiday. Whatever the motivation, a popular choice for securing the money is to apply for a personal loan, but if this is the first time you’ve considered borrowing money this way it’s important you understand exactly what a personal loan involves.

What is a personal loan?
Basically it’s a sum of money which an individual borrows from a bank or similar lender, under an agreement to repay the cash, and the interest charged, over an agreed period. Some personal loans can be used for any purpose the borrower wishes, others are tied to certain uses. It’s normal for the lender to ask why you are borrowing the money, and it is best to be honest. [There are different options for borrowing money for different reasons, so in some cases an extended overdraft may be a better choice.]

Who is eligible to apply for a personal loan?
Applicants must be at least 18 years of age; this is a legal requirement to borrow cash in the UK, regardless of ability and means to make repayments. In most cases you also need to be:

• Resident of the country you are applying
• Have a local address – and official proof of this, such as a utility or council tax bill
• Have a regular income and proof of earnings
• Have a good credit record

If you wish to apply for a joint personal loan both parties must pass the checks conducted and meet the eligibility criteria set by the lender.

How much can you borrow?
The usual minimum amount loaned is around £1000, and £25,000 is usually the ceiling for personal loans. There may, of course, be some circumstances where these numbers are flexible. In general, the less you borrow the faster you make repayments, and the majority loans have terms up to three years, though the largest amounts can take up to 25 years to pay off!

Places which offer personal loans
Most people choose to approach their usual bank or building society or a personal loan, but there are other places which offer them. These include credit unions, supermarkets, and should you qualify –some charities and the government. It is always worth checking out the various options you may have before committing to any one of them.

Types of personal loan

Secured personal loans
These rely on being tied to assets the borrower owns, usually property, and are more common when larger sums of cash (over, say, £25,000) are involved. Interest rates tend to be lower than those for unsecured loans as the lender is taking less risk. The main risk for the borrower with a secured personal loan is that should you fail to make the repayments the risk of losing the tied asset is very real. If you borrowed against your only home then the risk of losing it is something you need to keep in mind. In some cases you can use another valuable asset, such as jewellery, artwork, or leisure items like a boat, as security.

Unsecured personal loans
These are the most popular choice for a loan between say £1000 – £25000. As there is no asset secured against the debt lenders conduct credit checks and consider your incomings and outgoings before agreeing on a sum to lend. The interest rates are mostly higher than with a secured loan as a result. Borrowers may see unsecured loans labeled as ‘home improvement’ or ‘car’ loans, but they are all the same thing, just with a designated purpose.

The advantages of taking out a personal loan

• You should have the cash quite quickly after applying
• You can borrow both small and larger amounts
• The interest rate is often fixed, making repayments predictable
• The repayment length is often quite flexible, so you can choose something to suit your

• In some cases you can make extra payments without penalty
• They are cheaper than borrowing cash from a credit card

Disadvantages of taking out a personal loan

• The interest rate may be higher than other borrowing options (e.g. an overdraft)
• Loans of less than £1000 are difficult to find, so you could end up borrowing more than

you really need, which means higher repayments
• If you need a secured loan you risk valuable assets
• The best rates are reserved for customers with excellent credit scores

The costs involved with personal loans
Although the interest which will be added is to be expected there can be other charges that come with a personal loan, so it is worth checking out what the bottom line cost of any personal loan you enquire about actually is. These could include:

• Brokering fees
• Payment protection insurance (to cover payments if you lose your job or become ill, etc)
• Fast transfer fees (if you requested this service)
• Penalty fees for payments which are missed.
• An arrangement fee
• Early repayment (of whole or part of the loan) penalty fees

Interest rates
Nothing is for nothing, but that doesn’t mean you need to pay more interest on a personal loan than you absolutely need to. If you have the flexibility to shop around then do so as interest rates can differ quite dramatically between lenders, and even a marginally lower rate is worth having.

Working out how much interest rates really do add to a loan can be tricky, so rather than concern yourself with APR’s etc insist on seeing the total you will pay back, in writing. You could find that paying back a certain sum over 3 years rather than say five saves hundreds of pounds in interest.

There’s a lot to think about when considering a personal loan, but hopefully this guide had given you plenty of useful information to get started with. If you want to learn more, head over to Oink Money – Personal Loan UK.