What is a personal loan?

A personal loan is a type of flexible borrowing that you pay back in monthly instalments. There are various factors to think about when it comes to borrowing, including your eligibility, affordability and how much you’re able to borrow.

In this guide, we’ll explore everything you need to consider before applying for a personal loan. Find out how personal loans work and how to get one, to help you strike the right balance between what you hope to borrow, and what you can realistically afford.

In this guide:

• What is a personal loan?
• How do personal loans work?
• How long does it take to get a personal loan?
• Personal loan considerations 
• What happens if you don't pay back a personal loan in the UK?
• How to get a personal loan
• Finding the right lender 
• Struggling with the cost of living? Help is available without borrowing
• Personal loans: Key takeaways

What is a personal loan?

A personal loan is when you borrow a lump sum of money from a lender like a bank or credit union to cover a large expense, such as home renovations, personal events or even emergency expenses. You then have to pay back this loan in regular instalments, typically monthly, over a fixed period.

In the case of personal loans, including payday loans, you’ll agree to pay interest to the lender. The amount of interest you can expect to pay can vary based on factors such as the loan amount, repayment terms, and your creditworthiness.

Learn more about interest rates and how they can affect the cost of borrowing with our dedicated interest rates guide.

What are personal loans useful for?

There are many reasons why you might consider taking out a personal loan, including:

• Debt consolidation: Personal loans can help you pay off and group together multiple high-interest credit repayments with one lower-interest loan.
• Home improvements: Perhaps you need an extra boost to help you renovate your home? From kitchen make-overs to new bathrooms, some people may wish to stagger the upfront cost of renovations with a personal loan.
• Unexpected repairs: Personal and short-term loans can help cover emergency expenses, such as your boiler breaking down or major car repairs.
• Moving costs: Moving house can be expensive. If you’d prefer to spread the cost, using a personal loan that you can afford to repay may be an option.
• Big life events: Likewise, if you’re preparing for a special life event such as a wedding or dream holiday, you might want to help manage your budget using regular repayments.

What is an unsecured personal loan?

An unsecured personal loan is essentially the same as a personal loan. The term 'unsecured' just means that you’re not obligated to provide your home or any other valuable assets as collateral to the lender if you’re unable to repay the loan.

In contrast, 'secured loans' require you to pledge some form of security, usually your property, which the lender can seize if you fail to repay the borrowed amount.

How do personal loans work?

When you apply for a personal loan, you’ll often borrow a fixed sum that you’ll receive in one deposit. You’ll then be expected to repay the loan in monthly instalments with interest over a set period of time. These are the terms of the loan.

Personal loans can either be fixed or variable rate:

• Fixed rate loans: Your agreed interest rate remains the same throughout.
• Variable rate loans: The interest rate on your personal loan may vary, meaning it may go up or down and affect how much you pay back in instalments.

How many personal loans can you have at once?

There isn't a strict limit on the number of personal loans you can have simultaneously. You can take out multiple loans from the same lender (depending on their criteria) or get loans from different lenders. However, it's generally not recommended.

Managing numerous payments at the same time can lead to a cycle of debt. Additionally, whether a lender decides to lend to you can depend on their policies and eligibility criteria, and they may be cautious if they see that you already have multiple personal loans.

How long does it take to get a personal loan?

How long it takes to get a personal loan often depends on the type of loan, the lender, and the approval process. While some small loans may land in your bank account the same day, others may take a few weeks to be approved.

With Moneyboat, our fair and flexible short-term loans can arrive in as little as fifteen minutes, if you’re approved. Before we approve your application, we always ensure that you’re a good fit and can afford to meet the repayments. That’s what makes us a responsible direct lender.

Personal loan considerations

Before you apply for a personal loan, it’s important to weigh up some key considerations. Alongside interest and repayment terms, some loans may also involve additional fees, early repayment charges and terms and conditions.

Take a moment to reflect on how much you might be able to afford and borrow by exploring the following:

Am I eligible for a personal loan? And how much money could I get?

When you apply for a personal loan, lenders will see if you’re a good fit by using thorough eligibility and affordability checks. This can impact whether you’re eligible, how much you might be approved to borrow, and at what interest rate.

This includes your:

• Income and spending habits: Lenders will review your income and spending habits to assess your affordability, including household bills and regular expenses.
• Employment status: Some lenders, like ourselves, will require you to be in part-time or full-time employment to show financial stability.
• Existing debt and credit utilisation: Lenders will look to see how much debt you already have and whether you can afford to apply for more.
• Credit history: Loan applications check to assess your history of paying back previous credit, and whether you’ve missed repayments in the past. A healthy record of repaying credit shows you can be trusted with a loan.

Lenders may also consider your age, nationality and homeowner status to help make their assessment of your affordability and creditworthiness.

How much money should I borrow?

When borrowing money, you can borrow as much as the lender allows. However, it's generally advisable to borrow as little as necessary. Larger loans mean higher interest payments, and can take longer to pay off the debt. Therefore, keeping the loan amount to a minimum can help you manage your borrowing better. It also safeguards your credit rating, as missed repayments can negatively impact it.

What is the minimum amount of credit you need to borrow?

Before approaching any lenders, carefully consider the amount of money you truly need to borrow. Consider exploring alternative sources like friends and family, which may not involve interest and charges, helping bridge the gap between what you want to purchase and need to borrow.

Taking steps to minimise borrowing is generally wise. For instance, if you're using a loan for a renovation project, covering part of it with your regular income may help to reduce the amount you need to borrow.

If you can wait until your next payday to fix your washing machine and borrow only a small short-term loan to cover the remaining costs, you might save money by reducing potential interest payments.

How much money can you afford to repay on a loan each month?

Next, think about how much you can afford to repay each month. The best way to do this is to look at your monthly spending and figure out where you can cut back or how much you have spare to cover repayments. If you can see that you don’t have the money to cover a personal loan right now, it might be worth reconsidering and revisiting in the future.

For more monthly budgeting insights, explore our budgeting made simple guide. Our tips can help you make healthier saving and spending habits, so you can focus on achieving your goals and gaining financial confidence.

What happens if you don't pay back a personal loan in the UK?

If you fail to pay back the full personal loan repayments required by the lender each month, you’ll enter a process known as defaulting and receive a default notice from your lender. This indicates that you might have to pay additional charges or interest. The lender may also take further action to reclaim the debt. In addition, your missed payments could be reported to credit reference agencies, negatively impacting your credit score.

How to get a personal loan

Carefully consider each step below before you apply for a personal loan:

1. Check your credit score
2. Assess how much you need to borrow
3. Gather and compare free quotes using soft credit checks
4. Submit your application
5. Read the loan terms before you sign

As you consider your options, there are several questions you might want to revisit. Let’s recap:

• What’s the minimum I need to borrow to fulfil my needs?
• How much can I afford to repay each month?
• Do I have a strong credit score?
• Have I struggled with repaying debt in the past and if so, why?
• Do I have other debt I need to service?
• Do I have a steady income?
• What would happen if I lost my income? Would I still be able to meet my repayments?

Getting this right from the start can help you access the money you need without taking on a financial responsibility that you can’t afford.

Finding the right lender

Once you’ve calculated how much you need to borrow and how much you can afford to repay each month, it’s time to find the right lender. If you don’t need to borrow a large sum, direct lenders can offer smaller loan amounts – usually up to around £1,500. If you’re keen to take on a longer-term loan, a personal loan from a bank or building society may offer up to around £25,000, depending on your eligibility.

Choose a lender that offers the type of loan that works for your needs. It’s important to compare interest rates, charges and the total amount repayable carefully.

When you apply for a short-term Moneyboat loan, we’ll give you a loan example outlining all of the costs and repayment amounts. This will clearly show you how much it will cost overall and helps you to decide whether it’s the right choice for you. For more information about our flexible short-term loans and whether they could help offer temporary financial relief, explore our payday loan eligibility criteria guide.

Struggling with the cost of living? Help is available without borrowing

Borrowing to cover regular weekly or monthly expenses is never a sensible idea. However, if you’ve fallen into the habit of consistent borrowing, help is out there.

Reach out to third-party organisations such as StepChange, Citizens Advice, and MoneyHelper for free, independent advice. They can help advise you on debt solutions, as well as any benefits you might be entitled to but aren’t yet receiving.

You can also find help through the Trussell Trust, which can help connect you with local food bank projects that may help reduce your financial burden and provide essential groceries.

Personal loans: Key takeaways

If you’re employed with a steady income and a strong credit rating, you’re likely to be offered the personal loan you apply for. However, if you’ve had problems with making repayments in the past, or if you’ve not taken out credit before, your credit rating may be low.

This might mean lenders are less willing to offer you larger sums of money as you could be seen as high-risk. You may be able to get around this by applying for a guarantor loan, or even a secured loan if you are a homeowner – although this comes with additional risks.

Alternatively, you could try to improve your credit rating by taking out a small loan and making repayments in full and on time. This could improve your credit rating, making it easier to take out a larger loan on better terms later.

Moneyboat is here to help

Explore more financial tips and insights with our free tools and resources. Discover our guides to using Buy Now Pay Later with bad credit, personal finance 101, as well as our guarantor loan guide. Take meaningful steps toward financial confidence with Moneyboat today.