There is no single best way to borrow. The right option depends on how much you need, how quickly, how long you need to repay it and what your credit history looks like. Picking the wrong type can cost you more than it needs to, so it is worth knowing what is out there.
Here is a quick tour of the main kinds of credit in the UK, what each is good for and what to watch out for.
Unsecured personal loans
You borrow a fixed amount and pay it back in set monthly instalments over an agreed term. Nothing you own is put up as security.
Often used for: planned costs like a used car, a wedding or a kitchen, if you have a fairly strong credit record.
Watch out for: the best rates usually go to people with good credit. If you have missed payments in the past, you may be declined or offered a higher rate.
Secured loans: homeowner and logbook loans
With a secured loan, you put up something valuable as security. If you do not keep up repayments, the lender can take it.
- Homeowner loans are secured on your property. They can be used for larger amounts over long terms, but your home is at risk if you fall behind.
- Logbook loans are secured on your vehicle. With Logbook Money, you can borrow £1,000 to £50,000 over 18 to 60 months, and you keep the keys and drive as normal. The decision is based on your vehicle's value and affordability, not just your credit score, so bad credit is considered.
Watch out for: logbook loans are a costly way to borrow, and your vehicle could be repossessed if you miss payments. Always compare the total cost with other options first.
Guarantor loans
A friend or family member with good credit agrees to make your repayments if you cannot. This can help people with a thin or damaged credit record borrow.
Watch out for: it puts a real burden on the guarantor. If you fall behind, they will be asked to pay, and it could affect your relationship as well as their finances.
Credit union loans
Credit unions are not-for-profit, community-owned savings and loans co-operatives. You usually need to join first, and membership is often based on where you live or work. The law limits how much interest they can charge.
Often used for: smaller amounts, people who want a local and supportive lender, and building a savings habit at the same time.
Watch out for: some may want you to save with them for a while before lending, and amounts can be limited. You can find one near you through MoneyHelper.
Overdrafts, credit cards, BNPL and payday loans
These are flexible forms of credit you can dip into as needed.
- Arranged overdraft: handy for small, short gaps between paydays. Interest can add up quickly if you stay overdrawn for months.
- Credit cards: useful for spreading purchases, and 0% deals can help if you clear the balance before the offer ends. Only paying the minimum keeps you in debt for a long time.
- Buy now pay later (BNPL): splits a purchase into a few instalments, often without interest. It is easy to sign up for several plans and lose track, and late payments can lead to fees and may show on your credit file.
Payday and short-term loans sit at the far end of this group. They are small loans repaid over a short period. They are quick to get but can be very expensive for the amount borrowed. Our page comparing logbook loans with payday loans explains how the two differ.
How to compare the types of loan
Start with the questions that matter most: how much do you really need, and what monthly payment can you afford without strain? Then compare the total amount repayable across your options, not just the monthly figure. Our guides to interest rates and APR and comparing borrowing costs will help.
This article is general information, not financial advice. If you are thinking of borrowing to keep up with bills or other debts, get free advice from StepChange or Citizens Advice first. More credit is not always the answer.
Your car may be repossessed if you do not keep up repayments on a loan secured against it.
