Every Loan › Types of credit in the UK
Types of credit in the UK
Credit comes in several forms, and each works differently. Knowing the differences helps you understand the costs and risks involved before you sign anything.
Unsecured and secured credit
Credit is either unsecured or secured. With unsecured credit, such as most personal loans and credit cards, the lender has no automatic claim on an asset if you do not pay, though it can take action through the courts. With secured credit, such as a mortgage or a loan secured on your home, the lender can ultimately take the asset. Secured borrowing carries higher stakes, so read the terms very carefully. Car finance is a mix: with hire purchase the vehicle is effectively the security until it is paid off.
Personal loans
A personal loan gives you a lump sum that you repay in fixed instalments over a set term, usually from one to seven years. The interest rate is normally fixed for the term, so your payment is predictable. Rates offered to you depend on the lender's assessment of your circumstances. Check the early repayment terms: you generally have a legal right to repay early, but lenders can charge limited compensation.
Credit cards
A credit card gives you a limit you can borrow against repeatedly. If you pay the full statement balance by the due date, you generally pay no interest on purchases, though cash withdrawals are often charged from day one. If you pay less than the full amount, interest is added to the remaining balance. Paying only the minimum can mean the debt lasts many years and costs far more overall. Section 75 of the Consumer Credit Act can give you extra protection for some purchases between £100 and £30,000 paid for with a credit card (see your rights).
Overdrafts
An arranged overdraft is a borrowing limit agreed with your bank on your current account. An unarranged overdraft is going beyond that limit, or overdrawn with no agreement, and it can cost more and be refused. Since April 2020, UK banks must price overdrafts using a simple annual interest rate rather than a mix of daily fees and charges, so the cost is easier to compare. Overdrafts are generally designed for short-term use and can usually be withdrawn or reduced by the bank.
Car finance
The two common types are hire purchase (HP) and personal contract purchase (PCP). With HP you pay instalments and own the car after the final payment. With PCP, lower monthly payments are usually followed by a final choice: pay a large "balloon" payment to keep the car, hand it back, or part-exchange it, subject to mileage and condition terms. We cover this in buy now, pay later and car finance.
Buy now, pay later
Buy now, pay later (BNPL) lets you spread a purchase, often interest-free for a short period. Because it feels like a small, easy decision, people can end up with several agreements at once and lose track. Whether a particular plan is regulated depends on its terms, and the rules have been changing, so ask the provider and check the FCA website for the current position.
Guarantor loans
A guarantor loan needs another person, often a family member or friend, to agree to make the payments if you cannot. That person is legally responsible, so it is a serious commitment for them and can affect your relationship and their credit file. They should understand it fully and may wish to take independent advice first.
High-cost short-term credit
Small loans for a short term, historically called payday loans, are regulated by an FCA price cap because the costs were once extremely high. See high-cost short-term credit and the price cap. Such credit is rarely a sensible way to cover a regular shortfall, and free debt advice may help with alternatives.
Which type suits which purpose?
We do not recommend products, but these questions are worth asking: how long will I need the money, can I afford the repayments if my income dips, what is the total cost (see APR and total cost), and what happens if I miss a payment? A free conversation with MoneyHelper or Citizens Advice can help you think it through (free debt help).
This is general information, not financial advice. We're not a lender or broker and don't arrange credit.
Frequently asked questions
What is the difference between secured and unsecured credit?
Secured credit is tied to an asset, such as a home, which the lender can ultimately claim if you do not pay. Unsecured credit is not tied to an asset.
Is an overdraft cheaper than a credit card?
It depends on the individual rates, fees and amounts. Compare the actual interest rate and total cost for your situation rather than assuming.
Can I repay a personal loan early?
Usually yes, but the lender may charge limited early repayment compensation. Check your agreement.