Loans explained

Understand what a loan is and how it can help you manage your finances.

Essential loan information

Used wisely, loans are a powerful financial tool that can help you get what you want out of life.

What are personal loans?

A personal loan is pretty straightforward - you borrow a sum of money from a lender and make monthly repayments over an agreed period, usually between 1 and 7 years. Of course, lenders don't offer this service for free, so you'll also have to pay interest and possibly fees.

Unlike mortgages or secured loans, personal loans are not secured against an asset, such as your home, so it's less likely your home will be repossessed if you fail to pay. However, there are other consequences if you fail to pay - you'll get a bad credit score, making it difficult for you to borrow money or get credit even for smaller things such as a mobile phone contract, and you could be taken to court to retrieve the money.

Is a loan right for me?

When you're looking for credit, there are several options to consider:

  • credit cards,
  • overdrafts,
  • secured loans,
  • remortgaging your home,
  • personal loans.

Each of these borrowing options is suited to different goals and purposes. To help you decide if a personal loan is the right choice for your situation, ask yourself these key questions:

  • Do you need to borrow less than £25,000?
  • Will it take you more than a year to repay?
  • Do you prefer a fixed repayment schedule rather than a flexible one?
  • Have you got a fairly good credit history?

If you've answered yes to some or all of the above, a loan might be suitable. A loan might also be helpful to consolidate your debts if you have outstanding balances on one or more credit cards, depending on the interest rate you're paying. A personal loan can give you a structured repayment plan and fixed repayment amount.

A loan can be a great help in a variety of situations. Before taking on debt, it's always a good idea to consider both your short-term and long-term financial situation.

Paying for special occasions

Many of the key events and milestones in our lives, like weddings, cost more than what we have to hand. A loan can help make up any shortfall, but you'll want to avoid letting the excitement about your event cloud your financial judgement.

Don't borrow more than you can afford to repay, and remember that taking cost-saving steps when planning your event can save you lots of money down the road, by reducing the interest you have to pay.

Cars, home improvements and other large purchases

Looking to make some improvements to your home? Buy a new car? Take that big trip you've long promised yourself? Keep these tips in mind:

  • For car loans, get the best deal by checking out unsecured loan information from multiple lenders. Dealers offer their own financing, but you will often get a better deal if you shop around.
  • Keep in mind that a dealer offering 0% financing often doesn't discount the cost of the car itself. Negotiating a 15% discount on the car and then paying a higher interest rate on the loan could be the better deal.
  • For home improvements, consider your motivation. If you're looking to increase your home's value, do a bit of research in advance. Talk to a local estate agent to help you figure out what kinds of changes would add the most value.
  • For large purchases, remember it's cheaper in the long run if you save up the money and buy without a loan. Ask yourself if you need to buy now or if you can afford to wait.

Unexpected expenses

Many people find savings aren't enough to cover unexpected costs such as veterinary bills, or emergency home or car repairs.

A personal loan offers a structured way to cover your costs, especially if it will take you some time to repay. But if you think you'll be able to pay the money back within a year, a credit card may offer the more flexible solution, especially if you can take advantage of a 0% interest balance transfer offer.

Debt consolidation

Debt consolidation is one of the most common reasons to take out a loan. It can help you get your finances under control, but for it to work you need to be able to stick to a budget. You can use the loan to pay outstanding credit card balances, late bills and late loan repayments, turning many small debts into one larger one. By taking out a debt consolidation loan you can:

  • lower interest payments: credit cards or store cards may charge you 15%, 20%, or even 30% interest on your balance. While the interest rate you can get for a personal loan depends on your circumstances and the economy in general, it's usually much lower than a credit card or a store card.
  • simplify your financial situation: rather than getting swamped with bills and statements every month, you'll have just one loan to repay.
  • make financial planning easier: preparing and sticking to a monthly budget or creating a long-term financial plan is easier with a consolidation loan than with multiple credit card debts. The amount you repay each month is almost always fixed, as is the length of the loan. That means you'll know exactly how much you need to pay and for how long.

To make a consolidation loan worthwhile, you need to avoid spending any money on those cleared credit cards. To avoid temptation, try not keeping them in your purse or wallet and create a weekly or monthly budget.

You should check the cost as consolidating debt can be more expensive.

Give yourself the best chance of getting a loan by taking the time to:

  • make sure you meet the basic criteria for a loan,
  • work out how much you can borrow sensibly,
  • calculate a reasonable repayment term,
  • look for ways to improve your credit rating.

Will I qualify for a loan?

There are a few basic qualifications for taking out a personal loan in the UK:

  • you must be aged 18 or older,
  • you must be a UK resident,
  • you usually have to have a current account with your lender.

Do you meet these basic criteria? If you can tick these boxes, lenders will then look at your credit history and current financial situation to decide whether to lend to you. Having a good credit score and clear evidence you can cover your intended monthly repayments will make it more likely you'll be approved.

If the lender feels there's a risk you won't be able to repay your loan on time - based on a history of late or missed payments on other loans for example - they may reject your application or charge higher interest rates.

How much can I borrow?

Lenders typically offer unsecured loans in amounts ranging from £1,000-£25,000.

The amount you can borrow and the interest rate you receive is based on your personal circumstances. Lenders look at your credit record and the financial information in your loan application to decide whether you can reasonably repay the amount you're asking for.

How long can I borrow for?

How long you can borrow money for - the term - varies by lender, but you can typically find personal loans with terms ranging from 1-7 years.

Although taking out a loan for a longer term will probably get you a lower interest rate, the interest adds up as the years go by - and you'll end up paying more interest overall. To pay less interest overall, choose the shortest term you can afford on the lowest rate you can find.

To pay off your debt even quicker, look for personal loan information from several lenders to see who's flexible on early payment or allows additional repayments to be made, as many personal loans have penalties if you repay early. That way if you come into some money, you can be free of your loan in less time.

Improving your credit rating

Your credit rating is one of the most important factors in deciding whether you'll be offered a loan and whether you qualify for lower interest rates. Here are our tips for improving your credit rating:

  • Check your credit report: checking your report helps you find out where you stand and where you need to make improvements. It also gives you the chance to check for mistakes. You can get your credit report from agencies like Experian, Equifax and Callcredit.
  • Keep up to date on payments: late or missed payments for loans, credit cards or utilities are recorded on your credit report and could stay there for years. To improve your credit score you should always pay on time, even if you can only afford the minimum payment.
  • Make sure you're on the electoral roll: lenders often use electoral registers as one way to confirm your identity, so it's a good idea to sign up if you're not on there already - even if you don't intend to vote.
  • Build up a credit history: lenders look at your credit report to see if you have a reliable track record of repaying your debts. If you don't have any credit (for example credit cards or loans) it will be more difficult for lenders to make an informed decision and they may treat you as higher risk than you actually are.
  • Avoid making too many applications for credit: every time you apply for credit or a loan, a potential lender looks at your credit report. Each time this happens, it leaves a footprint. If you have an unusually high number of footprints on your credit report lenders may view this negatively, feeling that you're being rejected by other lenders or that you have too many financial commitments already.

APR (annual percentage rate)

If you're comparing personal loan information, consider the APR, or annual percentage rate. The APR gives you a single figure that includes the actual interest rate over the life of the loan as well as all the normal costs (such as administration fees or annual charges). It doesn't include additional charges such as fees for early or late repayment. The APR enables you to compare different loans.

Representative rates

The representative APR shown in an advertisement is the rate at or below which, Lenders reasonably expect 51% of customers to receive if they take out a loan in response to that particular advert.

Rather than getting swayed by "representative rates", check what your individual loan rate or total amount repayable will be before you commit.

Total amount repayable

For the best way of comparing loans with differing lengths and interest rates, ask for the total amount repayable. This is the total amount of money you have to repay the lender over the entire life of the loan - the amount you borrowed plus all interest charges and fees.



Bank over the phone 24/7 using our automated service - call 03459 758 758.

Telephone Banking


Find your nearest branch or cash machine using our Branch Locator tool.

Find branches