When you need to borrow, the first question is usually "how much a month?". It is a fair question, because the repayment has to fit your budget. But the monthly figure on its own can hide how much a loan really costs, and two offers that look similar can work out very differently.
This guide explains the two numbers that matter most, then runs through the main ways to borrow in the UK, how each one works and what to watch out for.
APR vs total amount repayable
APR stands for annual percentage rate. It combines the interest with any compulsory fees and shows the yearly cost as a percentage, so you can compare one product with another on a level footing. When you see a "representative APR" in an advert, at least 51% of people accepted through that advert should get that rate or lower. You might be offered something different.
Total amount repayable is the full sum you will have paid back by the end, including what you borrowed. This is often the more useful figure when you are deciding, because it shows the cost in pounds. A longer term can make the monthly payment smaller while making the total much bigger, even at the same APR.
Both numbers are useful. APR helps you compare products, and the total shows what a loan would actually cost in pounds.
Your main borrowing options compared
Overdrafts
An arranged overdraft is designed to cover a few days' shortfall before payday. Banks now have to show overdraft costs as a simple interest rate with an APR, and for many accounts that rate is high. It is built for very short gaps rather than borrowing that drags on for months.
Credit cards
If you clear the balance in full every month, a credit card can cost you nothing. Introductory 0% deals on purchases or balance transfers can help you spread a cost, though transfer fees usually apply and the rate jumps when the offer ends. Only paying the minimum means a balance can take years to clear.
Bank and building society personal loans
These are usually unsecured, with a fixed monthly payment over a set term. They tend to offer the lowest rates to people with a strong credit history, and rates are often better for mid-sized amounts than very small ones.
Credit unions
Credit unions are not-for-profit and owned by their members. The interest they can charge is capped by law, and many will lend to people turned down elsewhere. You usually need to live or work in a particular area, or for a certain employer, to join.
Logbook loans
A logbook loan is secured on your vehicle with a Bill of Sale, or a Hire Purchase agreement in Scotland. At Logbook Money you can borrow £1,000 to £50,000 over 18 to 60 months, and our decision is based on your vehicle's value and affordability rather than your credit score alone. It is a more expensive way to borrow than a mainstream bank loan, and your car is at risk if you fall behind. Check the representative example on our logbook loan calculator and compare the total repayable with your other options.
Payday and short-term loans
These are designed for small amounts over a short time and are among the most expensive forms of credit, although the FCA caps what they can charge. Our page comparing logbook loans and payday loans explains the differences.
Do you need to borrow at all?
Before you take on credit, it is worth checking a few alternatives. If you receive Universal Credit, you may be able to apply for an interest-free Budgeting Advance. If you have some savings, using them may cost less than borrowing, though many people prefer to keep a buffer. Our guide on using savings or borrowing walks through the trade-off.
Questions to ask before you choose
- What is the total amount repayable, and could I pay it back faster to save money?
- Is the interest fixed, or could the repayments go up?
- Is the loan secured on anything, and what happens if I miss a payment?
- Can I settle early, and would I get a rebate on the interest?
- Does the repayment still fit my budget if my income drops or costs rise?
This article is general information, not financial advice. If you are borrowing because you are already struggling with debts, talk to a free adviser at StepChange, National Debtline or MoneyHelper first. They can help you find a way forward without adding to what you owe.
Your car may be repossessed if you do not keep up repayments on a loan secured against it.
