Types of personal loans

Types of personal loans

Whether you want to buy a car, pay for house improvements or clear more expensive debts, a personal loan could be the answer. But as with any borrowing, it’s important to read the small print and know the potential pitfalls.

Written by Abigail Montrose on 16 September 2013

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What are personal loans?

Personal loans are a way of borrowing money over the longer term usually at a fixed rate of interest. You then repay the loan in regular instalments over a fixed period of time (known as the term). This makes it easy to budget for as you know exactly how much it will cost each month and how long it will take to pay back the loan.

There are two types of personal loans - unsecured and secured. 

Unsecured loans

These enable you to borrow sums of money over the short to medium term. Typically, you can borrow from £1,000 to £15,000 although many lenders now offer up to £25,000. Loans can be for as little as six months or 1 year and up to between five and 10 years depending on the provider.

You may want a personal loan to pay for a large item such as home improvements or a car or to pay off more expensive borrowing such as credit and store card bills. 

Secured loans

These loans tend to be for larger amounts borrowed over longer periods. Typically, you can borrow from £5,000 to £60,000 or more for anywhere between three and 30 years depending on the lender.

Secured loans are usually for larger amounts, so you have to provide your lender with some form of security such as a property you own. If you don't keep up the repayments on your loan your lender can force you to sell this property to get back its money. So you could lose your home. If you already have a mortgage on the property the new loan is known as a second charge (and legally stands behind your mortgage which is the first charge on the property). If you own the property outright it's called a first charge. 


You pay interest on your loan and there is often an arrangement fee too with secured loans. If you take out payment protection insurance (PPI) to cover your repayments if you become ill, have an accident or are made redundant, then the cost of this insurance may be included in your monthly repayments. You do not have to have PPI and this should be made clear to you when you take out your loan.

The interest on your loan plus all other charges is expressed as an annual percentage rate (APR). You can use the APR to compare the cost of loans. But this only tells you how much your loan costs each year.

The longer you have a loan the more interest you can expect to pay. So the overall cost of a loan with a high APR over a short period could work out cheaper than a loan with a lower APR over a longer period.

In general, the more you borrow the lower the interest rate on offer. This is because the lender will earn more interest overall. But the interest rate advertised isn't what you necessarily pay. 

Credit checks and personal pricing

Many lenders have introduced personal pricing. This is when they look at your credit rating to decide how much interest they will charge you on a loan (this also happens with credit cards). If you have an adverse credit record you may only be offered the loan if you pay a higher rate of interest. For more on improving your credit rating see our guide. 

Early repayment penalties

You may also find yourself incurring extra cost if you pay off your loan early or make overpayments each month. Many loans have early repayment penalties and can mean you pay one or two months' interest for paying off early.

However, if you have an unsecured loan which you took out after 1 February 2011, you can pay off your loan in full without any extra charges, so long as it’s not over £8,000. There are also no extra charges if you pay off a variable rate loan early.

For more on this see our guides on repaying a loan early.


Personal loans are offered by banks, building societies, the Post Office, friendly societies, credit unions, the financial subsidiaries of supermarkets and other specialist lenders.

Other guides which might interest you

Cost of borrowing

Types of borrowing

Repaying a loan early

What are credit unions?

Peer to peer lending


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