How this is worked out
Repayments use the standard annuity formula:
M = P · r(1+r)ⁿ ÷ ((1+r)ⁿ − 1)
where P is the amount borrowed, r is the annual rate divided by twelve and n is the number of monthly repayments. Interest is charged on the outstanding balance each month and the remainder of the repayment reduces the capital, which is why early repayments are mostly interest.
Any arrangement fee is added to the total cost of credit rather than to the repayment. UK personal loans rarely carry one — if yours does, and it is added to the balance rather than paid separately, put it in the amount borrowed instead.
The refinance comparison runs the formula twice and adds the switching cost to the new total. Break-even is the switching cost divided by the monthly saving; the lifetime difference is what actually decides whether the swap is worth making.
A worked example
- Amount borrowed
- £15,000
- Rate / term
- 7.9% APR over 5 years
- Monthly repayment
- £303.43
- Total interest
- £3,205.71
- Arrangement fee
- £0
- Total cost of credit
- £3,205.71
- Total repayable
- £18,205.71
Representative APR means slightly more than half of applicants
An advertised "7.9% representative APR" is a legal statement that at least 51% of people accepted for the product got that rate or better. It is not an offer, and it is not what the other 49% were charged. Those applicants were offered a higher rate after the lender saw their file, at which point most people accept because they have already made the decision.
Two protections are worth using. Ask for a quotation search rather than a full application — a soft search that gives you the actual rate without leaving a hard footprint on your credit file. And check eligibility checkers before applying, since a sequence of declined hard searches is itself damaging.
Enter the rate you have actually been offered above, not the advertised one. The gap between the two is often two or three percentage points, which on £15,000 over five years is several hundred pounds.
Your right to repay early, and the 58-day rule
Under the Consumer Credit Act 1974 you can settle a regulated loan early at any time. The lender may charge compensation of up to 58 days’ interest — one month plus 28 days if more than a year remains, otherwise a maximum of one month. That is the legal ceiling, and it is far milder than mortgage early repayment charges.
Partial overpayments carry the same protection. Tell the lender in writing that the payment is a partial settlement under section 94, and ask specifically whether it reduces the term or the monthly repayment. Reducing the term saves considerably more interest, and several lenders default to the other option.
On the worked example, an extra £50 a month clears the loan ten months early and saves £556 in interest — comfortably more than a 58-day settlement charge would cost.
Section 75, and why a card can be safer than a loan
If you pay for something costing between £100 and £30,000 on a credit card, section 75 of the Consumer Credit Act makes the card issuer jointly liable with the retailer if things go wrong. Buy the same item with a personal loan and that protection does not exist.
For a car in particular this matters. Paying even the deposit on a credit card brings the whole purchase within section 75 in many circumstances, which is meaningful protection on a used vehicle from a dealer that might not still be trading in six months.
Hire purchase and PCP agreements are regulated credit too, with their own protections — including the right to voluntary termination once you have paid half the total amount payable. That is a genuinely valuable right that PCP customers are rarely told about.
Refinancing, and when it is worth the paperwork
Switching a personal loan is less common in the UK than in the US, largely because early settlement is cheap but new applications leave a mark on your file. It becomes worthwhile when your credit position has genuinely improved, or when you took the loan during a period of higher base rates.
The comparison panel above will tell you plainly if the new deal lowers the repayment while raising the total — a longer term marketed as a saving. Consolidating several debts into one longer loan almost always falls into this category: the monthly figure drops, the total paid rises, and the underlying spending has not changed.
Assumptions and sources
- Amortisation formula
- Standard annuity formula applied monthly. Verified in tools/test/finance.mjs against published repayment tables.
- Representative APR
- FCA rules require at least 51% of accepted applicants to receive the advertised representative APR. checked 2026-08
- Early settlement
- Consumer Credit Act 1974 sections 94–95 and the Consumer Credit (Early Settlement) Regulations 2004: maximum 58 days’ interest. checked 2026-08
- Section 75
- Consumer Credit Act 1974 section 75 — joint liability for credit card purchases between £100 and £30,000. checked 2026-08