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A personal loan is a simple way to borrow money. A lender gives you a lump sum upfront, and you repay it in regular monthly instalments over an agreed-upon term (typically one to seven years), usually with interest on top. It isn’t tied to your car, your home or any other asset. It’s an unsecured loan, which means it’s based on your circumstances, not what you own.
In this guide, we’ll explain what a personal loan is, how it works, what you can use it for, and what to consider before you apply.
How do personal loans work?
A personal loan works by giving you a lump sum upfront that you repay in fixed monthly instalments over a set term, often with interest. You apply, the lender reviews your details, and if you’re approved, the money is deposited directly into your bank account.
Here's how a personal loan works, step by step:
1. You apply for a quote
You’ll share personal information, which may include your income, expenses and credit history. You can complete many personal loan quotes quickly online.
2. The lender gives you an initial rate
Some lenders may run a soft credit check to understand your eligibility without affecting your credit score. At this stage, they may offer you an initial interest rate.
3. The lender assesses your application
If you choose to proceed, the lender typically conducts a hard credit check and assesses your financial situation before deciding whether to offer you a loan.
4. You receive the funds
If your application is accepted, you’ll receive a formal offer detailing the amount you wish to borrow and the interest rate. Once you agree to the terms, the money is deposited into your bank account, often within one to two working days.
5. You repay the loan
You make regular monthly repayments over a fixed term, commonly ranging from one to seven years. Some lenders allow overpayments or early repayment, although fees usually apply, so it’s worth checking in advance.
Because personal loans are unsecured, you don’t need to use your car, home or any other asset as collateral (more on this later). That makes them useful when you want to spread the cost of a larger expense, such as home improvements or consolidating existing debts, without tying the loan to something you own.
And with fixed payments each month, you can plan, stay in control of your budget and know exactly what you’ll repay over the full term.
Key features of personal loans
Most loans share a few standard features that can vary from lender to lender, and understanding these is key to the definition of a personal loan. Here’s what to expect at a glance:
| Personal loan feature | What it means |
|---|---|
| Borrowing amount | You borrow a lump sum – the total amount depending on the lender and your eligibility. |
| Loan term | You repay the loan over a fixed period, typically ranging from one to seven years, depending on the lender. |
| Repayments | You make regular monthly payments, helping you plan and stay in control of your budget. |
| Interest & APR |
Most personal loans come with a fixed interest rate, which is part of the total cost of borrowing, represented as the APR. A personal loan APR includes the interest payable on what you're borrowing and any compulsory fees, providing you with a bigger picture of the total cost of borrowing. |
| Fees | Some lenders may charge fees, such as an arrangement fee and an early repayment fee, so it's worth checking the terms before applying. |
| Eligibility | Lenders assess factors such as your credit history, income and existing debt to determine your eligibility. |
| Funding | Once approved, the funds are usually transferred quickly, sometimes the same day. |
Types of personal loans
Personal loans come in different types, but most are defined by these key factors: whether they are secured or unsecured, and whether the interest rate is fixed or variable. Knowing these basics helps you choose a loan that suits your needs and budget.
Unsecured vs secured loans
Most personal loans are unsecured, which means you don’t need to tie the loan to a car, home or any other asset you own. The lender assesses your financial situation to decide whether to lend to you and at what rate. This type of loan doesn’t put your belongings at risk.
A secured loan uses an asset, like a car or property, as collateral. As the lender has security, you may be able to borrow more or secure a lower interest rate. This type of personal loan carries more risk, because if you can’t keep up with repayments, your asset could be repossessed.
Learn more about the differences between secured and unsecured loans.
Fixed vs variable interest
Fixed-rate loans have an interest rate that stays the same throughout the loan term. Your monthly repayments are predictable, making it easier to budget and plan your finances.
Variable-rate loans have an interest rate that can fluctuate over time, which means your monthly repayments may increase or decrease. While rates can fall, which may reduce costs, they can also rise, so there’s more uncertainty with this option compared to fixed interest personal loans.
What can you use a personal loan for?
Most lenders offer flexibility in how you use your personal loan. Some of the more common uses of a personal loan include:
- Home improvement loans: Renovate, redecorate or upgrade your space.
- Car loans: Buy a new or used vehicle without paying everything up front.
- Debt consolidation loans: Combine multiple debts into a single, easier-to-manage monthly payment.
Note: Unsecured personal loans should not be used for gambling or betting, high-risk speculative investments (like cryptocurrencies or forex trading). Additionally, lenders generally exclude business or commercial purposes, as well as property costs like house deposits, timeshares, or buying property abroad.
What do you need to get a personal loan?
When you apply for a personal loan, lenders typically request specific information to verify your identity, income and ability to repay. While requirements vary by provider, you may need to provide:
- Contact details: Your name, phone number, and email address.
- Address history: Usually, the last three years of addresses are used to help verify your residency.
- Employment and income details: Information about your job and earnings to confirm you can manage repayments.
- Bank account details: Your bank account information for receiving funds and setting up monthly repayments.
Things to consider before taking out a personal loan
Before taking out a personal loan, it's important to consider whether it fits your financial situation. Here are the key factors to keep in mind:
- Understand the full cost: Ensure you know the total amount you'll repay, including interest and any additional fees, to avoid any surprises.
- Check the interest rate: The rate you're offered will depend on your credit history and the loan amount, so compare options carefully.
- Assess affordability: Make sure your monthly repayments are manageable, even if your income or expenses changes.
- Consider the risks of miss payments: Failing to make repayments can trigger extra charges and may negatively affect your credit score.
Taking the time to review these points can help you make an informed decision on whether a personal loan is right for you.
How to apply for a personal loan?
Applying for a personal loan is usually straightforward, but taking the following steps can help you choose an option that suits your needs.
1. Check your eligibility
Now that you know what a personal loan is and how it can be used, it’s time to check eligibility. Review the lender’s requirements, such as minimum age and residency, to make sure you qualify. Check your credit score, as this can affect the interest rate and your chances of approval. Even if you have a low credit score, you may still be able to get a personal loan.
2. Calculate your needs
Work out the amount you need to borrow and estimate your monthly repayments to ensure they fit your budget.
3. Compare rates and terms
Different lenders offer different interest rates, fees and repayment terms. Comparing these helps you find the loan that works best for your budget. Carefully consider a loan amount that suits your budget and needs to avoid repayment stress.
4. Submit your application
Provide the lender with the necessary information, including your personal details, proof of income and bank account details.
5. Receive approval
The lender will assess your application and, if approved, provide an offer detailing the loan amount, interest rate and repayment schedule. Read the loan agreement carefully.
6. Receive your funds
Once you accept the offer and sign the agreement, the money will be transferred to your bank account.
Remember: only borrow what you can comfortably repay. Personal loans could be a helpful financial tool, but missing payments can result in additional charges and negatively impact your credit score.
Why apply for a personal loan with The AA
Choosing the right personal loan can feel overwhelming, with so many options available. But if you’re looking for a straightforward way to borrow, our personal loans could help you to plan and manage repayments.
Interested in learning more about what we at The AA could offer? You can apply for an unsecured personal loan with The AA and NatWest Boxed if you:
- Are aged 18 or over
- Are a UK resident with a UK address
- Haven't been declared bankrupt in the last 6 years
- Haven't applied for a loan with The AA or NatWest in the last 28 days
Explore our personal loan options today.
FAQs
Can I repay a personal loan early?
Yes, many lenders allow you to repay a personal loan in full before the end of the term. Some lenders charge an early repayment fee, so it’s important to check the loan terms before applying.
What happens if I miss a loan repayment?
Missing a personal loan repayment can result in late fees and negatively impact your credit score. Lenders may also contact you to arrange a repayment plan. If you run into difficulty making a repayment, contact your lender as soon as possible to discuss your options.
What is the best personal loan in the UK?
The “best” personal loan depends on your individual circumstances, including your credit score, income and borrowing needs. Look for competitive interest rates, manageable monthly repayments, transparent fees, and flexible loan terms. Comparing multiple lenders can be a great way to find a loan that fits your budget and goals.
Is a personal loan a good way to build credit?
A personal loan could help improve your credit score if you make repayments on time and in full. Regular, on-time payments demonstrate to lenders that you can manage debt. However, missing payments can have the opposite effect, so it’s important to borrow an amount you can comfortably repay.
Does a personal loan go into your bank account?
Yes. Once your personal loan is approved and you accept the offer, the funds are typically transferred directly into your bank account. Depending on the lender, this could happen the same day or within a few business days, giving you quick access to the money you need.
How quickly can I get a personal loan?
The speed of obtaining a personal loan depends on the lender and how quickly you provide the required information. Many lenders offer online applications with decisions in minutes, and funds could be deposited into your bank account on the same day or within one or two business days.