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Personal loans explained
What is a personal loan?
An unsecured personal loan allows you to borrow a lump sum over a fixed period for a fixed rate.
This type of borrowing can help fund a home improvement project, consolidate your debts, or buy a car.
Here, we explain the key things you need to know when shopping around for a personal loan and the alternatives that could be cheaper.
How to compare personal loans
Here's a step-by-step guide to finding the best personal loan deal for your circumstances.
Decide how much to borrow
Usually, you can borrow between £1,000 and £25,000 with an unsecured personal loan, although loans for as much as £50,000 are sometimes available.
Choose your term
Personal loans are generally paid back over a period of between one and 10 years.
Just remember that while spreading out repayments over a longer period will lower the monthly cost it will mean you pay more in interest.
So for example, a £7,500 loan with a 6.1% APR taken out over three years will cost around £228 a month and you would pay back £8,206 in total. If you took the same loan out over five years the monthly repayments would be lower at £145 but the total amount repayable would be higher at £8,686.
Compare the costs
You can use the annual percentage rate (APR) to compare the costs of loans.
The APR takes into account any fees and charges that you may have to pay, as well as the interest rate. The lower the APR, the cheaper the loan.
What is APR?
In this two-minute video, Which? explains what APR stands for and how it's different from a standard interest rate.
Check for early repayment penalties
If you want to pay more of your loan each month than is required, or want to pay it off entirely with a lump sum before the end of the term, some lenders might charge you a penalty for the privilege.
It isn't unusual to be charged one or two months' interest.
However, there are loan providers who don't charge early repayment penalties. If you think you might be able to pay off your loan early, it makes sense to go for one of these.
- Find out more: how to cancel a loan - we explain what to look out for if you want to cancel a loan early
How to find the cheapest personal loans
Typically, smaller loans (£1,000-£4,999) tend to come with much higher rates compared to medium-sized loans (£5,000 - £7,499) and larger loans (£7,500+).
So it's worth checking if borrowing a bit more could save you money. For example, borrowing £5,000 rather than £4,500 might unlock a better rate with a lender. Just check the total amount payable to see which deal is cheaper overall.
- Find out more: we regularly analyse hundreds of deals to find the best personal loan rates on borrowing from £5,000 up to £25,000
What loan rate will I get?
Loan APRs are 'representative', meaning that you might not get the rate that a lender advertises.
Providers only have to offer their typical loan rate to at least 51% of borrowers who apply. So if you have a poor credit score, you might be charged a higher rate.
Some lenders allow you to do a 'soft' credit check to see what rate you are likely to qualify for, before doing a full application which will leave a hard credit check on your credit report.
Having too many hard credit checks within a short period of time can adversely affect your credit rating, making it harder to borrow.
- Find out more: how to check your credit report
What is a secured loan?
Secured loans are backed by your property, meaning that your home could be repossessed if you're unable to keep up with repayments. For this reason, it's best to tread very carefully when considering this type of borrowing.
Rates on secured loans tend to be slightly lower than unsecured loans for larger amounts. However, secured loans also tend to have higher minimum advances and longer minimum terms. Paying a lower loan rate over a longer period of time can be more expensive overall than taking out a higher rate loan over a shorter period.
Secured loans also have variable rates, meaning that your provider can increase the cost of borrowing at any time. In contrast, unsecured loans are offered at a fixed rate, so you know from the outset how much you'll be paying.
An alternative may be to increase your mortgage to release cash from your home.
- Find out more: remortgaging to release equity and cash from your home
What are the cheap alternatives to a personal loan?
You might be able to borrow for less with these options.
A fee-free overdraft
A fee-free overdraft will be cheaper than borrowing with a personal loan, so check what your provider will offer.
First Direct, for example, offers a £250 interest-free overdraft.
- Find out more: best bank accounts for overdrafts
Credit union loans
Loans from credit unions are generally cheaper than loans from most other providers for smaller amounts and do not incur set-up fees, administration costs or early redemption fees.
Many credit union loans will cost 1% a month on the reducing balance of a loan (an APR of 12.7%). Some credit unions may charge more than this, although by law the amount of interest charged by a credit union can be no more than 2% a month on the reducing balance of a loan (an APR of 26.8%).
0% credit cards
The best 0% purchase credit cards currently let you borrow interest-free for up to 21 months, although you’ll need a good credit score to access the best deals.
If you need a cash boost, don't use a 0% purchase credit card as this will be treated as a ‘cash advance’. Instead, try a 0% money transfer credit card. These cards allow you to shift cash from the credit card to your current account interest-free for a set period.
- Find out more: best credit card deals 2023