How do personal loans work?

A personal loan allows you to borrow the money you need and spread the cost over a series of fixed-rate monthly instalments.

You might be undertaking home renovations, planning a dream wedding or buying an e-bike to improve your morning commute. When you successfully apply for a personal loan, you’ll be given the money you need upfront which allows you to buy what you need straightaway. You’ll then pay back what you owe by making the agreed monthly repayments over a set timeframe.

It’s important to fully understand what a personal loan is and how it works before applying, to ensure you’re making an informed financial decision.

In this guide, we go into detail on how personal loans work and the key features you need to know about.

Understanding personal loans

Most personal loans are fixed rate

When you take out a fixed rate personal loan, the interest rate will remain the same for the lifetime of your loan. This means your repayments will stay the same each month so you’ll always know how much money you owe your lender and when. Having no variation in interest rate charges can help you manage your outgoings more effectively as your regular repayments won’t fluctuate.

There are many advantages to fixed rates. For one thing, they’re often considered more straightforward. You don’t need to worry about what the market’s doing, or how this might impact your interest, because you know exactly what you have to repay both monthly and over the lifetime of your loan too.

Of course, if market rates change and interest rates subsequently drop, you may find yourself paying more interest in total compared to other variable rate products. While this is a potential downside of a fixed rate product, you may feel that enjoying the stability of a fixed rate payment is more important.

Our guide on the difference between fixed and variable rates goes into more detail.

Personal loans are normally unsecured

This means you don’t need to secure your loan against an asset such as your house or car. For some borrowers, this is considered less of a risk as you won’t lose your assets if you fail to make your repayments.

However, if you do default on your loan this will be recorded on your credit file which may make it more expensive and more difficult to obtain credit in the future.

Whether you choose an unsecured or secured finance product could also impact how much you could borrow and over how long. That’s because, with an unsecured personal loan, the lending decision will be based on your creditworthiness and paying capacity rather than also taking into consideration the value of your assets.

As you may be able to borrow more with a secured loan, it’s likely you’ll be able to borrow for a longer period of time too. While this might reduce your monthly repayments, you could end up paying more interest in total with a secured loan as you’ll be ultimately borrowing money for longer.

When deciding whether to opt for a secured or unsecured loan consider:

  • What you plan to use the money for
  • How much you want to borrow and over how long
  • The maximum amount you can comfortably set aside for loan repayments
  • Your credit history
  • Whether you have any assets to put down as collateral, and their value

For more information, read our guide on the difference between unsecured and secured loans.

Applying for a personal loan

Decide how much to borrow and for how long

Each lender will offer different maximum loan amounts. At Novuna Personal Finance, you can apply for up to £35,000.

However, the amount you will be able to borrow will depend on:

  • Your credit history

Lenders like to know you’re a ‘safe bet’, with a strong track record of repaying what you owe on time. Individuals with a strong credit report and payment history may have a better chance of being offered the best rates for the money they wish to borrow.

  • Your affordability

Lenders have a duty of care to ensure you can comfortably afford the additional debt you have applied for, without new repayments putting unnecessary strain on your finances.

The amount of debt you have compared to the amount of money you have coming in could impact how much you’re able to borrow. For example, an individual with no debt may be more likely to be accepted for a higher loan amount compared to an induvial on the same salary with several credit commitments.

  • The loan term

You may find you’re able to borrow a larger amount of money if you spread the cost over a longer period of time (depending on your individual credit history and affordability, of course). That’s because spreading the cost over a greater term will bring your monthly repayment down, which may make borrowing more money more affordable for you.

Do keep in mind, though, that you will likely pay more interest in total if you extend your loan term as you’ll be borrowing money (and therefore paying interest) for longer.

How long you’re able to borrow money for will also depend on the lender. Before applying for a loan, always check a lender’s individual terms to make sure it’s affordable for you to borrow the money you need.

Use an online loan calculator to help you determine how much a loan will cost you each month and in total. You can change the amount you want to borrow and the loan term to see how these factors might impact your repayments.

Our guide on how much you can borrow with a personal loan goes into more detail.

Check your eligibility

Before applying for a personal loan, it’s important to research lenders carefully and scrutinise their eligibility criteria. This is essentially a checklist of requirements you must meet before you will be considered for a loan.

At Novuna Personal Finance, we require all applicants to: be aged 21 or over, be a permanent UK resident with a three-year address history, be in permanent paid employment, self employed or retired with a pension, have an income greater than £10,000, have a bank or building society account and have a good credit history.

Even if you meet a lender’s eligibility requirements, successfully applying for a loan will depend on whether the lender believes you are a suitable fit for the financial product they’re offering. This is often assessed by looking at your creditworthiness and your affordability.

Understand how your credit history impacts your personal loan application

As part of the personal loan application process, a lender will conduct a hard credit check. This will involve a review of your credit report (which is essentially a record of how you’ve handled debt in the past).

Lenders use your credit report to assess how likely you are to make your repayments. If you have a good credit history, you’ll have plenty of experience managing debt and making your repayments on time. A poor credit history may indicate past financial difficulties or evidence of mismanaged debt (such as late or missed payments).

Your lender will decide what interest rate to offer you based on how much of a risk you’re perceived to be. An individual with a good credit history is more likely to be offered the best rates, as they’re more likely to repay their loan on time. Those with a less-than-perfect credit history may be offered higher APRs as lenders may feel they’re at greater risk of missing or making late payments.

If you’re concerned about how your credit history might affect your ability to get a loan, take a look at our guide on improving your credit score.

Understand how your income and current debts impact your personal loan application

To be accepted for a loan, you must be able to afford the repayments. Lenders have a duty of care to customers to ensure this is the case.

Lenders will assess your affordability by looking at the money you have coming in, and how much of that money is already accounted for by current debt. This is called your debt-to-income ratio. It’s recommended to keep your debt-to-income ratio below around 40% (basically, try to make sure less than 40% of your income is going towards repaying your debts).

Ultimately, it’s also your responsibility to ensure your loan repayments will be affordable before applying. Think about how much money you have coming in each month, and whether new loan repayments would be affordable for you once other credit commitments, day-to-day living costs and other essential expenditure is paid off.

For more information, head over to our guide on how lenders make a decision on your application.

What documents will I need when applying?

The Novuna Personal Finance application process is paperless from start to finish, which means it’s straightforward to apply online.

You will need to provide personal information such as your name, date of birth, address history, marital status, and contact details. We also need to know your annual income and employment details, along with your bank account details.

Some of this information will be shared with fraud prevention and Credit Reference Agencies in order to perform a credit check, which helps us make a lending decision.

Once your application has been submitted, your application will be instantly accepted, declined or referred. If your application is referred, this just means we need to conduct a few more checks or gather a bit more information from you (such as recent bank statements) before making a final decision. If you opt to use open banking to share the information we need to see, the process is much quicker, and we can make a lending decision almost straightaway. It may take a little longer to manually assess bank statements you send us.

If your application is accepted, we may need to verify your UK passport and driving licence via our secure online portal. Applicants are asked to upload images of the required documents within the portal to allow us to conduct our verification checks.

At Novuna Personal Finance, we don’t require you to share any hard documents with us nor will you have to sign any physical paperwork either. Everything can be done digitally, including the e-signature process.

Getting approval

How long does it take to get a personal loan?

The length of time it takes to get a personal loan will depend on the lender you choose.

Here at Novuna Personal Finance, the whole process could take just two working days or less, depending on the following factors:

  • Speed of application process

Our application process is designed to be straightforward and quick to complete. It should take less than ten minutes to fill out and submit. You’ll be told instantly whether your application has been accepted, declined, or referred.

  • If your application is referred

It may take a little longer to get a personal loan if your application is referred, as we’ll need a bit more information from you. However, if you use open banking to share the information we need, we’ll be able to make a lending decision almost instantly which will speed up the time it takes for you to get a loan.

  • How long it takes for you to sign your credit agreement following your application being accepted

We’ll need you to read and e-sign your credit agreement before we can deposit funds into your account. If you do this immediately, we can get going with processing your loan.

You do, of course, have 30 days to sign your credit agreement before your loan offer expires and another application will need to be submitted. If you delay signing your agreement this will inevitably hold up how long it takes for your loan to be disbursed.

  • Processing your loan funds

We pride ourselves on depositing funds within two working days once an application has been fully completed and the credit agreement signed.

Are there any fees associated with a personal loan?

There is, of course, a cost associated with borrowing money, so you’ll pay interest on almost any personal loan you take out. This is usually expressed as the Annual Percentage Rate (APR), which includes both the interest rate and any additional fees. This gives you a better idea of how much your monthly repayments will be when comparing personal loans across multiple lenders.

It’s worth noting that, while some lenders may charge fees when you take out a loan, there will be no upfront fees or hidden charges when you borrow from Novuna Personal Finance (though we will charge up to two months’ interest if you settle your loan early).

Look out for advance fee fraud

Reputable lenders will NEVER request upfront payment at any stage of the loan application process.

If you are asked to pay an advance fee in order to access a loan, be extremely cautious. Never provide any personal bank account or card details to a “lender” asking you to make an advance payment.

Our guide shares the latest scams to look out for to help you avoid becoming a victim of fraud.

Repaying your personal loan

If you take out a personal loan, you will be required to make regular monthly repayments. These monthly instalments are calculated by dividing the total amount payable (which includes interest) by the number of months on your loan term.

You have the option to settle your loan early or make overpayments at any time.

Making overpayments

You may choose to make extra payments to pay off the loan faster. If you pay less than your monthly repayment figure, your next monthly repayment will be reduced by the amount you overpaid.

When you make an extra payment that’s more than your regular monthly amount, this will automatically be deducted from your outstanding balance and therefore reduce the loan term. Reducing the loan term also reduces the amount of interest you’ll have to pay in total, as you’ll be borrowing money for a shorter amount of time.

Settling your loan early

With Novuna Personal Finance, you are entitled to settle your loan at any point. You’ll need to request a settlement figure from your lender, which will tell you how much you need to repay to close your loan early.

Your 'settlement date' will be taken to be 28 days after the date you tell us you want to pay off your loan in full (or 58 days on an agreement with an original term of longer than 12 months). This basically means you’ll be required to pay either one or two months of interest to settle your loan early.

Read our guide on paying off personal loans early for extra information.

Advantages of personal loans

There are several advantages of using a personal loan, including:

You can be flexible with the money you borrow

Personal loans are versatile and can be used for a wide range of purposes, from home improvements and buying a new car to consolidating your debt. It’s up to you how much money you choose to borrow and (to some extent) what you use the money to buy.

You’ll be given one lump sum, and it’s your choice whether to use all or just part of it to make a significant purchase. You could even use a personal loan to fund extras such as your holiday wardrobe or furnishings for your newly-extended home should you wish to.

While there are, of course, things you can and can’t use a loan for, a personal loan can give you some much-needed flexibility compared to other types of borrowing.

Fixed interest rates provide stability and consistency

Most personal loans have a fixed rate of interest, which means your monthly repayments remain consistent throughout the loan term. This structured way of borrowing can help you to manage your outgoings and your budget, as you know exactly how much you need to repay, and how long you’ll be making repayments for.

Competitive interest rates

Personal loans may offer lower interest rates compared to other forms of credit such as credit cards.

Of course, the interest rate you’re offered is entirely individual to you and will depend on your credit history, personal and financial circumstances, how much money you wish to borrow and how long you want to borrow for.

No need to put down a deposit

Unlike some types of financial products, such as car finance or a mortgage, you won’t need to put down a deposit when you take out a personal loan.

If you make a successful application, you’ll receive the full amount of money you applied for upfront to spend how you choose (aside from any personal loan use exemptions detailed by your lender).

Less risk to your assets

Personal loans are typically unsecured, so you won’t need to secure your loan against valuable assets such as your house or car. This reduces the risk of your property being seized if you don’t repay your loan.

Do be aware that defaulting on your loan still has consequences. Late or missed payments will be recorded on your credit file, which could make it more expensive and more difficult to borrow in the future.

Smooth and simple application process

The personal loan application process is usually faster compared to other types of loans, such as mortgages. Here at Novuna, our online application takes just a few minutes to complete and we’ll give you an instant lending decision.

As personal loans are usually unsecured, there’s no need to put up any assets as collateral either which also reduces the time it takes for your loan to be approved and completed.

A personal loan can help to improve your credit history

Successfully managing a personal loan can positively impact your credit history, by demonstrating to future lenders that you can responsibly handle debt.

A loan may also contribute to a healthy credit mix, showcasing you can comfortably repay a type of instalment credit (a type of credit where you must repay over time via a series of set payments).

Disadvantages of personal loans to consider

While personal loans offer many advantages, there are certain risks and disadvantages you should also be aware of.

Additional debt

Taking on any level of additional debt can be risky. You’ll need to make sure the repayments are affordable for you and have a clear plan in place for repaying what you owe.

You’ll also pay interest for the privilege of borrowing money, which means taking out a personal loan is more expensive than saving up and making a purchase outright.

High interest rates

Personal loans can have relatively high interest rates compared to alternative forms of credit, such as mortgages or interest free finance.

Some finance products with lower interest will also come with longer repayment terms, though, which could mean you’ll end up paying more interest in total.

Strict approval criteria

Having a good credit history is an eligibility requirement for many lenders. This could make taking out a personal loan difficult or more expensive if you’ve experienced financial difficulties in the past.

Limited flexibility on repayments

Most personal loans have fixed interest rates, so your monthly repayments will always stay the same. For many, this is considered a good thing. However, if your financial circumstances change you may find being committed to paying a fixed sum each month challenging.

We always ask customers to talk to us if they are worried about money, so we can work together to find the most suitable route forward.

Negative impact if you don’t pay back what you owe

A late or missed payment will be recorded on your credit file. This can make it more difficult to borrow in the future, as prospective lenders may consider you more of a risk. Our guide on how personal loans could impact your credit score might be useful to you.

If you continue to fail to make the agreed repayments, your lender may even take legal action against you. It’s essential you understand the consequences of defaulting on your loan and ensure you can comfortably afford the monthly repayments before applying.

There are, of course, other borrowing alternatives including secured loans, credit cards, car finance, mortgages and home equality lines of credit.

Before applying for credit, do your research thoroughly to assess which finance product might be most suitable for your individual needs. Think about how much you want to borrow, how long you want to borrow money for, how much interest you’re prepared to pay in total, and how much you can afford to repay each month.

Our guides on the difference between personal loans and credit cards and personal loans vs car finance could help you take the next step on your decision-making journey.

Apply for a personal loan today

With Novuna Personal Finance, you can borrow from £1,000 up to £35,000 and spread the cost between 2 and 7 years. Our rates start from just 7.4% APR Representative (£7,500-£25,000).

Will you use a loan to buy your dream wheels, jet off on a bucket list holiday or get converting a campervan to take you on priceless adventures?


Written by

Sophie Venner

Sophie Venner is a Yorkshire-based content writer specialising in crafting content for the financial services industry. She’s written over 300 articles on finance, but she’s covered everything from insurance to digital marketing trends. Her content has been featured in the likes of Semrush, Digital Marketing Magazine and Insurance Business. In her spare time, you won’t find Sophie far from a notepad and pen as she squirrels away trying to write a novel.

Wednesday 15th November 2023