When taking out a personal loan makes sense

The case for personal loans in today’s UK market

Personal loans are not niche products. They sit at the centre of the UK’s credit landscape and, used correctly, can lower overall borrowing costs and introduce certainty into monthly budgeting. In 2025, average personal loan debt per UK household edged up to £5,711, reflecting how common these products have become and the role they play in managing larger purchases and consolidating costlier debts. Lending has recovered since the pandemic, with consumer credit reaching roughly £33.5 billion in March 2025. That growth signals renewed confidence, but it also raises the stakes for choosing credit wisely.

The pricing advantage is clear. Bank of England data shows average APRs of around 11.13% for £5,000 loans and 6.73% for £10,000 loans. Compare that with overdrafts averaging about 38.01% and many credit cards charging north of 20% APR. If you are planning a defined expense or rolling multiple balances into one, a fixed-term personal loan can be the cheaper and more predictable route. Repayments are fixed, so you know exactly when the balance reaches zero.

Typical loan sizes reflect practical aims. UK consumers most often borrow for home improvements, debt consolidation, or a car purchase, with average amounts in the £12,000 range and terms commonly stretching to five years. That term length helps balance monthly affordability with total interest paid. Higher incomes often qualify for lower APRs, with some borrowers earning £50,000 or more seeing average rates under 14%. Your credit profile, income stability, and loan size will shape the deal you are offered.

There is a note of caution. Younger adults are taking on consumer credit earlier, which can complicate later goals like a first home. Financial literacy matters. Understanding APR, fees, and how term length affects total cost can be the difference between a helpful tool and an expensive mistake. The rise in households considering a personal loan suggests growing acceptance. The key is to use loans strategically: to replace higher-rate borrowing, to invest in home value, or to smooth a necessary cost with a clear payoff plan.

At Kandoo, a UK-based retail finance broker, we match applicants with a panel of lenders to help secure competitive rates. We focus on clarity so you understand the numbers before you commit. A good loan is not simply the lowest advertised APR. It is the one whose repayments fit your budget today and your goals tomorrow.

Understanding APR is not just about percentages. It is about what you will pay in real pounds each month and over the full term.

A personal loan makes sense when it lowers your total borrowing cost, creates certainty, and aligns with your income. It does not make sense if it masks overspending or repeats a cycle of revolving debt without a realistic plan to repay.

Who should consider this kind of borrowing

If you have a defined purpose and a realistic repayment plan, a personal loan can work for you. Homeowners planning value-adding improvements may prefer fixed repayments over tapping a credit card. Drivers replacing a car often find loans cheaper than dealer finance or overdrafts, especially for larger sums. Households juggling multiple balances at higher rates can consolidate to cut interest and simplify budgeting.

If your income is stable and you can pass affordability checks, a fixed-rate personal loan offers predictability. It can also help build credit when repayments are on time. Younger borrowers should proceed carefully. Early credit use can be helpful, but only if repayments are comfortably affordable and you avoid taking on new high-cost debt after consolidating. If your budget is tight or your income fluctuates seasonally, consider smaller amounts, shorter terms, or alternatives that build safety rather than strain cash flow.

The essentials you need to know

• APR: The annual percentage rate covers interest and certain charges, giving a single comparable cost figure across lenders.

• Representative APR: The rate at least 51% of successful applicants receive. Your actual APR may be higher based on credit and income.

• Fixed term: Personal loans run for a set period, often two to five years, with fixed monthly repayments.

• Total amount repayable: The sum of the principal plus all interest across the full term. Longer terms lower monthly cost but increase total interest.

• Early repayment: Many lenders allow early settlement. Some may charge up to two months’ interest as an early repayment fee.

• Soft search vs hard search: Soft searches check eligibility without impacting your credit score. A full application uses a hard search that appears on your file.

• Debt consolidation: Rolling multiple balances into one loan at a lower APR to reduce cost and simplify payments.

• Affordability: Lenders assess income, outgoings, debts, and credit history to ensure repayments are sustainable.

Where a personal loan fits among your choices

1. Home improvements: Funding essential repairs or value-adding upgrades can be sensible, particularly when the APR is below typical credit card rates and you have a clear budget and contractor quotes.

2. Debt consolidation: Replacing multiple higher-rate balances with a single lower-rate loan can reduce total interest and stress, provided you close or restrict old credit lines to avoid reborrowing.

3. Car purchase: Loans can undercut dealership finance for some borrowers, especially at larger loan sizes where APRs tend to fall. Compare like-for-like including any fees.

4. Major life expenses: Weddings, relocations, or training costs can be financed if they deliver long-term value. Avoid borrowing for discretionary extras if it pushes your budget too far.

5. Emergency costs: If you need funds and cannot access savings, a personal loan is often cheaper than an overdraft or a high-interest credit card, but confirm the total repayable and explore hardship support.

What it costs and what is at stake

Who qualifies and why it matters

Eligibility hinges on your credit profile, income, and overall affordability. Lenders review your credit file to understand past behaviour, including payment history, utilisation, and any defaults. They also consider income stability, existing commitments, and your debt-to-income ratio. If you earn £50,000 or more and have strong credit, you may see more competitive APRs, especially on larger loans near £10,000 where average pricing has been favourable in 2025. Applicants with thinner files or recent missed payments can still be approved, but at a higher rate or smaller amount.

Purpose can influence appetite. Loans for home improvements, car purchases, or consolidation are mainstream and often align with five-year terms. Lenders will test whether repayments fit your monthly budget after essentials and existing debts. If the affordability check is tight, consider requesting a smaller amount or a longer term to reduce the monthly burden, then overpay when possible. Using an eligibility checker that performs a soft search helps you gauge options without affecting your score. As a broker, Kandoo helps match you with suitable lenders and avoids scattergun applications that can harm credit.

From application to payout in clear steps

1. Check soft-search eligibility across multiple lenders first.

2. Set a budget cap using take-home pay and essentials.

3. Compare APRs, fees, and total repayable side by side.

4. Choose term length balancing monthly cost and total interest.

5. Submit documents for income, ID, and address verification.

6. Review agreement carefully and sign digitally when ready.

7. Receive funds to your bank, usually within 1-3 days.

8. Set up direct debit and consider early overpayment options.

Weighing benefits against drawbacks

Red flags to consider before you commit

Take a hard look at your budget. If the monthly payment only works by cutting back on essentials, consider a smaller loan or longer term and plan to overpay later. For consolidation, close or limit old credit lines to avoid sliding back into revolving debt. Be wary of low headline APRs that you may not qualify for. Representative rates apply to just over half of successful applicants. Calculate the total amount repayable across the full term and compare it with doing nothing or with alternatives like a promotional balance transfer. If your job is uncertain or your income varies, build a buffer. A missed payment can harm your credit and increase costs later.

Sensible alternatives to compare

1. 0% balance transfer credit card for existing card debt, if you can clear the balance within the promotional period and afford any transfer fee.

2. Overpayment plan using savings to reduce high-cost balances first, preserving an emergency fund of at least three months’ expenses.

3. Credit union loan with community-based underwriting that may be more flexible for thin or recovering credit files.

4. Secured borrowing like homeowner loans, only if you fully understand the risks of putting your property at risk for lower rates.

Common questions answered

Q: When does a personal loan beat a credit card? A: For larger, planned expenses or consolidation, loans often carry lower APRs than cards. They also provide fixed repayments and a clear end date, improving budgeting.

Q: How much can I borrow and for how long? A: Typical personal loans range from £1,000 to £25,000, with two to five-year terms common. Amount and term depend on income, credit, and purpose.

Q: Will applying harm my credit score? A: Checking eligibility via a soft search will not. A full application uses a hard search that appears on your credit file. Multiple hard searches in a short period can lower your score temporarily.

Q: Can I repay early without penalty? A: Many lenders allow early settlement. UK rules permit charges up to roughly two months’ interest. Ask for a settlement figure and compare savings.

Q: Is consolidation always cheaper? A: Only if the new APR and total repayable are lower and you stop using the old credit. Otherwise, you risk paying more and extending debt.

Q: How are rates set for different amounts? A: In 2025, average APRs improved on larger loans. For example, £10,000 loans averaged around 6.73% versus roughly 11.13% for £5,000. Your personal rate varies by profile.

What to do now

Map your monthly budget, including essentials and a buffer, then calculate the maximum affordable repayment. Use a soft-search eligibility check to compare APRs, fees, and total repayable. If consolidating, plan to close old accounts and commit to a payoff date. Kandoo can help you compare options from multiple UK lenders without multiple hard searches, so you see realistic offers before applying.

Important information

Kandoo is a UK-based retail finance broker, not a lender. We introduce you to lenders and may receive a commission. Rates and terms vary by applicant and are subject to status and affordability checks. Borrow responsibly and seek independent advice if unsure.