A loan is a way of borrowing money to pay for something, which you should generally only use for a one-off, necessary and affordable purchase – for instance, a new fridge, or a car. Only ever take out a loan if you’ve carefully planned and budgeted for the repayments, and you’re certain you won’t have any problems paying it off in full.
Personal loans are generally best for borrowing between £3,000 and £50,000. If you’re planning on borrowing less than £3,000, you might be able to pay no interest for up to two years with a 0% purchase credit card. If you’re planning on paying off debts with a loan, it may be cheaper to use a money transfer credit card.
How does a loan work?
When you’re accepted for a loan, you enter into a loan agreement with the credit provider. The provider lends you a certain amount of money, and in exchange you agree to pay it back with interest in a set amount of time. You’ll typically make a set repayment on your loan each month.
When you repay a personal loan, you’ll pay interest on the amount you’ve borrowed. This is a set annual rate that doesn’t change during the course of the loan term, and it’s factored into your monthly repayments. The shorter the repayment term, the less interest you’ll pay.
For example, you can currently borrow £5,000 at a representative annual interest rate of 3.4%. If you repaid this loan over three years, you’d pay back a total of £5,262.28 with a monthly repayment of £262.28.
For smaller, one-off purchases, you could get an interest-free loan through buy now, pay later provider.
What are the different types of loans?
There are different types of loans – which one is best for you depends on your personal circumstances.
Personal loans
The main type of loan is a personal loan, where you agree to repay a certain amount plus interest over a set period of time – this is normally between two and five years. Personal loans are generally best for borrowing amounts between £3,000 and £50,000. We’ve plenty more information on this type of loan in our full guide.
If you think a personal loan is right for you, use our loans eligibility calculator to find out which providers are most likely to accept you.
Buy now, pay later
Buy now, pay later (BNPL) is an increasingly popular type of loan, where a credit provider such as Klarna lends you money to make a particular purchase, such as a new laptop. You’ll then repay the loan either in one of several ways, such as in full but a month after you make the purchase, or in a small number of monthly instalments. An upside of BNPL is that it’s normally interest-free, but it has its downsides as it’s so easy to access.
Compare different buy now, pay later providers, or see the pros and cons of BNPL compared to credit cards.
Payday loans
Payday loans are an even more dangerous form of borrowing that charge much higher rates of interest than a traditional personal loan, often leading to a spiral of debt. They’re popular due to the fact that those with poor credit scores are more likely to be accepted for them than other forms of credit.
If you’re considering taking out a payday loan, make sure you read our comprehensive guide to them first.
Should I get a credit card instead?
Depending on your circumstances, a credit card might be a more suitable form of borrowing. There are multiple types of credit card to consider. It’s worth noting that you should avoid withdrawing cash on a credit card, as it usually comes with a hefty interest rate.
0% purchase credit card
A 0% purchase card lets you use a credit card to make purchases and not pay any interest for a set period of time. The current top options offer around 24 months interest-free. Compared to a personal loan, which charges interest, it’s a great option if you’re borrowing smaller amounts.
Make sure you can clear the balance in the interest-free period, or you could pay very expensive interest after this (normally around 21.9% rep APR, though this can be higher). See our guide on the best 0% credit cards for more.
Balance transfer credit card
If you’ve got existing credit card debt, a balance transfer credit card lets you shift that debt to a new card, but at 0% interest for a certain amount of time. This means you’re debt-free quicker, as your repayments go towards clearing the balance rather than interest. Make sure you clear the debt in the interest-free period to avoid paying interest after this.
The top options currently give you over 30 months interest-free to repay the balance. The longest deals tend to charge a fee, usually around 3%, but there are fee-free balance transfer cards that give around 22 months interest-free. See our guide on the best balance transfer credit cards for more.
Money transfer credit card
A money transfer credit card lets you transfer money from a credit card to your bank account for a small fee, usually around 4%. It’s useful if you need a cash loan, or want to pay off your overdraft. Some money transfer cards give you a certain amount of time to repay the balance interest-free, with the top options giving up to 18 months at 0% interest. Make sure you can clear the balance on the card within the interest-free period to avoid paying expensive interest.
For smaller amounts, a money transfer card beats a personal loan, which charges interest. See Best money transfer cards for more.
What does rep APR mean?
Representative Annual Percentage Rate – or rep APR – is the interest rate that the majority of people are offered for a certain loan. Crucially, ‘majority’ here can mean just 51% of people.
For example, if you see a loan is being sold at an interest rate of 3.5% rep APR, this just means that at least 51% of those accepted have been offered that particular rate. You could apply for the loan, be accepted for it, and be offered a significantly higher rate, for example 7%.
Unfortunately there is no way to see with certainty the exact interest rate you’ll be offered – rep APR just acts as a useful guide.
Why is it good to check eligibility before applying for a personal loan?
If you decide that a personal loan is the best option for you, you can apply for one with a wide range of providers. But before you do, it’s worth using our loans eligibility calculator to see which loans you are eligible for. This is because when you apply for a loan, the provider will run a credit check on you, examining your circumstances to determine whether or not it wants to lend you money. It uses a wide range of factors to do so, including your income, profession, outgoing costs and more.
Undergoing credit checks can impact your ability to get credit in the future, so it’s very important to only do so when absolutely necessary. Even if you’re accepted for credit, credit providers will still be able to see your credit application on your credit file, and it could still affect your credit worthiness.
By using our loans eligibility calculator, you’ll be able to see how likely you are to be accepted for loans with different providers, without any impact on your credit score. You can then make a more informed decision regarding which provider you’d like to apply for a loan with.
It’s worth noting that even if you’re highly likely to be accepted for a certain loan, you may still be rejected, which could harm your credit worthiness. You could also be accepted for a loan but offered a higher interest rate than the representative APR.
