How personal loans work

A personal loan provides a fixed lump sum, repaid through fixed monthly instalments over an agreed term (commonly one to seven years), at a fixed interest rate agreed at the outset — giving predictable payments for the life of the loan, unlike a credit card or overdraft.

Understanding "representative APR"

Lenders must advertise a "representative APR," which only has to be offered to at least 51% of successful applicants — meaning the rate you're actually offered, based on your individual credit profile, can be higher than the advertised headline rate. Getting a personalised quote (ideally via a soft-search eligibility checker) gives a more accurate picture than relying on the advertised rate alone.

Secured vs unsecured loans

Most personal loans are unsecured, meaning they're not tied to a specific asset — if you default, the lender can't automatically repossess your home or car, though it will still damage your credit file and could lead to other debt recovery action. Secured loans, tied to an asset like your home, generally offer lower rates in exchange for that asset being at risk if you can't repay.

Early repayment

Most personal loans allow early repayment, though some charge a small early repayment fee (usually capped by regulation at a modest amount). If you come into extra money, checking whether clearing a loan early makes sense — factoring in any fee against the interest saved — is worth doing rather than assuming it's automatically the best move.

Comparing the total cost, not just the rate

Two loans with similar advertised rates can have different total costs depending on term length and any fees — a longer term reduces the monthly payment but usually increases the total interest paid overall. Comparing the total amount repayable, not just the monthly payment or headline rate, gives the clearest picture.

Key takeaways

  • Personal loans offer fixed payments over a fixed term at a fixed rate, unlike revolving credit.
  • The advertised "representative APR" may not be the rate you're actually offered.
  • Most loans are unsecured, but secured loans carry lower rates with an asset at risk.
  • Compare total amount repayable across different terms, not just the monthly payment.