Personal loans can be a smart financial tool—or an expensive mistake. The difference comes down to why you’re borrowing, what rate you’re offered, and whether you can afford the repayments.
This guide helps you decide if a personal loan makes sense for your situation, with clear examples of when borrowing works—and when it doesn’t.
What is a personal loan?
A personal loan gives you a lump sum upfront, which you repay in fixed monthly instalments over a set term (typically 1-7 years).
UK personal loans are usually:
- Unsecured (no collateral required)
- Fixed rate (monthly payment stays the same)
- Fixed term (you know exactly when it ends)
Unlike credit cards or overdrafts, personal loans can’t be used flexibly—once you borrow, you’re committed to the repayment schedule.
When a personal loan makes sense
1. Consolidating expensive debt
If you’re paying 20-30% APR on credit cards, consolidating into a personal loan at 7-10% APR can save thousands in interest.
Example: £8,000 credit card debt at 24.9% APR
- Paying £250/month = 46 months to clear, £3,408 interest
- Personal loan at 8.9% for 36 months = £253/month, £1,108 interest
Saving: £2,300
Use our loan comparison tool to see if consolidation saves you money.
2. Funding home improvements
Loans for renovations that increase your home’s value can be a good investment—especially if the alternative is higher-interest financing.
Avoid borrowing for purely cosmetic changes that don’t add value.
3. Covering unexpected costs
Car repairs, emergency dental work, or other essential one-off expenses can justify a loan if you don’t have savings to cover them.
Just ensure the monthly payment fits your budget without causing financial stress.
4. Buying a car (if the rate is competitive)
Personal loans can be cheaper than dealer finance, especially if you have a strong credit score.
Compare the loan APR to the dealer’s finance APR, and remember that paying cash (if possible) avoids interest altogether.
When to avoid personal loans
Holidays or luxuries
Borrowing for experiences you can’t afford means paying interest on memories. Save up instead—or choose a cheaper alternative.
A £3,000 holiday on a 5-year loan at 9.9% APR costs £3,800 total. That’s £800 extra for something that’s already over.
Business startup costs
Personal loans aren’t designed for business use. If the business fails, you’re still personally liable for repayments. Look for business loans or investor funding instead.
Anything you could save for in 6-12 months
If you can afford to save £200/month, you’ll have £2,400 in a year without paying any interest. Borrowing that amount at 8% costs roughly £100 in interest.
Patience saves money.
Topping up existing debt without a plan
Borrowing more when you’re already struggling just delays the problem. Seek debt advice from StepChange or Citizens Advice instead.
Understanding APR
APR (Annual Percentage Rate) is the true cost of borrowing—it includes both the interest rate and any mandatory fees.
Representative APR
Lenders advertise a “representative APR” that only 51% of accepted applicants receive. The other 49% get a higher rate based on their credit score.
Always check what rate you’re offered before committing.
Fixed vs variable APR
Fixed APR (most common for personal loans):
- Rate stays the same for the entire term
- Monthly payment never changes
- Easier to budget
- Protected from Bank of England rate rises
Variable APR (less common for personal loans):
- Rate can change based on the base rate or lender’s discretion
- Monthly payment can increase
- May start lower than fixed rates
- Carries more risk
For predictable budgeting, choose fixed APR. Only consider variable if you can afford potential payment increases. Compare your options with our variable rate calculator.
How much can you afford?
The 30% rule
Your total monthly debt payments (including the new loan) shouldn’t exceed 30% of your take-home income.
Example: Monthly income after tax = £2,500
- Maximum safe debt payments = £750/month
- Existing commitments = £400/month
- Maximum new loan payment = £350/month
Use a loan calculator to see what loan amount and term fits this payment.
Account for life changes
Can you still afford the loan if:
- Your income drops?
- Your rent increases?
- Your car needs expensive repairs?
Build a buffer into your budget. If £350/month is your absolute maximum, borrow less so the payment is £300/month instead.
Alternatives to personal loans
0% purchase or balance transfer credit card
If you can repay within 12-24 months, a 0% credit card costs no interest—far better than a loan. Just ensure you clear the balance before the 0% period ends.
Savings
If you have savings earning 4% but borrow at 8%, you’re losing 4%. Only keep savings for true emergencies.
Borrow from family
Interest-free borrowing from family avoids costs—but treat it seriously. Put the agreement in writing to prevent relationship damage.
Increase your overdraft
Only for short-term gaps (a few weeks). Overdrafts are expensive for long-term borrowing—APRs often exceed 30%.
How to choose the right loan
1. Check your credit score
Your credit score determines what APR you’re offered. Check for free with ClearScore, Experian, or Credit Karma before applying.
Fix any errors on your report first—they can cost you hundreds in higher interest.
2. Compare at least 3 lenders
APRs vary significantly. Compare banks, building societies, and online lenders to find the best rate.
Use our loan comparison tool to evaluate multiple offers side-by-side.
3. Consider the term carefully
Longer terms = lower monthly payments but more total interest. Shorter terms = higher monthly payments but lower total cost.
Choose the shortest term you can comfortably afford.
4. Read the fine print
Check for:
- Early repayment charges
- Arrangement fees
- Late payment penalties
- Payment holidays (and their cost)
Some lenders allow unlimited overpayments; others charge fees. Know before you commit.
Put it into practice
Personal loans work best for essential purchases, debt consolidation, or emergencies—not luxuries or expenses you can save for.
Before borrowing:
- Calculate your monthly payment and confirm it fits your budget
- Compare loans from multiple lenders to find the best APR
- Consider how overpayments could save you money
For more practical finance guides, explore our guides.
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Put This Into Practice
Use our free calculators to model your own scenarios