How do loans work?

If you’re looking to borrow money for a larger purchase, a personal loan may be the answer. Personal loans are often unsecured, meaning that they don’t require a home or other assets to back them.

Ideal for buying a new car, making home improvements, or covering the wedding costs, personal loans allow you to borrow fixed amounts of money for a fixed amount of time, with fixed monthly repayments.

You’ll also pay a rate of interest on your monthly repayments. This can either be a fixed amount of interest each month with a fixed-rate loan, or a fluctuating rate of interest with a variable-rate product.

Some benefits of a TSB personal loan are:

• If you’ve held a TSB current account for more than 3 months and are approved before 6pm. Or the next day if not (excluding Sundays and bank holidays). Lending is subject to approval and the actual rate offered will depend on our assessment of your personal circumstances.
• You can get your quote in just 2 minutes - and you could receive your money the same day, if you’re a TSB customer already.
• You’ll have the flexibility to make overpayments or request a repayment holiday** if needed, subject to approval.
• Plus, your personalised quote won’t affect your credit score.

***With a repayment holiday, the term of your loan will increase, meaning you may pay more interest. You can apply for 2 non-consecutive, one-month repayment holidays every 12 months. Subject to approval.

Here, we’ve put together some insightful information and guidance to demystify personal loans and help you choose the right type of borrowing for you.

Important things to know about loans

Loan amounts and terms

The amount you can borrow through loans will depend on your own financial circumstances and there will be a variety of products to suit your needs whether that is a smaller amount for the short term, or something more substantial for a longer period of time.

Find out more about a personal loan with TSB.

Interest rates

Interest rates are applied to loans on either a fixed-rate or variable-rate basis. With a fixed-rate loan, the interest will stay the same throughout the loan term, whereas a variable-rate loan’s interest will fluctuate.

See what you could borrow with our Loan Calculator. Please note that this calculator is only for unsecured loans, as standalone secured loans are only available to mortgage customers.

Representative example:

5.9% APR representative for loans between £7,500 and £25,000 for 1-5 years The representative APR is the Annual Percentage Rate of charge. You can use it to compare the overall cost of credit between different lenders.

Repayment structure

Loans are typically paid on a fixed monthly repayment basis. These repayments consist of a payment toward the principal amount borrowed, as well as an interest fee payment.

If you’ve agreed a fixed-term rate of interest, these interest payments will remain the same each month across the term of the loan. But if you chose a variable-rate loan product, your interest payments could change month-on-month in response to market conditions.

Types of personal loans

Unsecured vs. secured loans

Personal loan products can be described as either secured or unsecured.

Read our recent article on the differences between secured and unsecured loans for more information.

Fixed-rate vs. variable-rate loans

A fixed-rate loan simply means the rate of interest will not change during the loan’s term. As a result, monthly payments remain the same.

The interest rate of a variable-rate loan can fluctuate. Depending on market conditions, this means repayments can increase and decrease during the loan’s term as the interest rate changes.

Application process

Pre-application considerations

Take your time and read each question carefully – for example, check whether it's asking for your yearly salary or the amount you take home after tax. Getting the details right helps make sure your application is assessed properly.

When you apply for a loan, make sure your financial situation is in the best possible shape to help you get approved. Is your credit score strong, and is any existing borrowing under control? Do you have enough disposable income to comfortably make your repayments?

Think about if a loan is the right type of borrowing for your needs, or maybe a credit card or overdraft could be more suitable?

Documentation required

Before applying, try to have all the correct documentation in place to make your application as easy as possible. As well as your personal information, be sure to have your bank details, employment details and proof of address on hand. The lender you choose will let you know if they require anything else. This could include certified ID or a P60, for example.

Approval process

Once you’ve submitted your application, the lender will run some checks before they approve your loan. Depending on the provider, this will include credit and financial checks and document verification. In some instances, you may even be pre-approved for a loan. You can search for pre-approved loans without affecting your credit score and apply with the knowledge that you have the best chances of being accepted for the loan.

Costs associated with loans

When you take out a loan, it’s important to consider the additional costs that come with it. Make it a priority to read the small print and check terms and conditions to fully understand the fees associated with your loan before you commit to it.

Interest charges

When applying for a loan, you should check the interest rate and how it is applied to your loan to understand how much interest you will need to repay on your borrowings. The longer the loan term, the more interest you’ll pay. Remember that if you take out a variable-rate loan, the amount of interest you pay can fluctuate in line with market conditions. You’ll need to be prepared to pay more charges if the interest goes up.

Fees and charges

As well as interest, other additional costs may potentially apply. This could include loan application fees, origination fees, late payment penalties and early repayment charges (ERCs). It’s always best to have a thorough conversation with the lender about additional costs and fees that apply to your loan in advance.

Try our Loan Calculator to see what you could borrow.

Final thoughts

At TSB, we are dedicated to responsible lending and to helping you find the perfect borrowing solution to suit your needs. We have a wide range of handy guides available to help inform your decisions. From guides and articles, to our Loan Calculator and support channels, we’ve got you covered.

18+ and UK resident only (21+ if applying online for some loans). Lending is subject to approval and actual rate offered will depend on our assessment of your personal circumstances.