Understanding the Basics of Borrowing Money in the UK

Borrowing money means receiving funds now and repaying them later, with interest. Every form of credit - from a mortgage to a credit card overdraft - works on this principle. Understanding the key terms before you borrow helps you compare options fairly and avoid paying more than you need to.

What is APR and why does it matter?

APR stands for Annual Percentage Rate. Lenders are required by the Financial Conduct Authority (FCA) to display APR on all consumer credit products. It includes the interest rate plus any mandatory fees, expressed as a yearly figure. Comparing APRs lets you see the true cost of different borrowing options side by side.

A personal loan advertised at 6.9 per cent APR will cost less in total than one at 12.9 per cent APR, assuming the same loan amount and term. The FCA requires lenders to display a "representative APR" - the rate offered to at least 51 per cent of successful applicants. Your actual rate may be higher, depending on your credit profile.

What is the difference between secured and unsecured borrowing?

Secured borrowing ties the loan to an asset - almost always your home. If you do not keep up repayments, the lender can repossess that asset. Mortgages and secured homeowner loans are the most common examples. Because the lender has collateral, secured loans typically offer lower interest rates than unsecured products.

Unsecured borrowing is not tied to an asset. Personal loans, credit cards and overdrafts are all unsecured. If you default, the lender cannot automatically take your property, but they can pursue you through the courts, which can lead to a county court judgement (CCJ) or, in serious cases, bankruptcy proceedings.

What do lenders look at when you apply?

Lenders assess your application using your credit file, income, existing debts and affordability. They obtain your credit file from one or more of the three credit reference agencies. Your credit file shows your payment history on existing accounts, any defaults or CCJs, your level of existing debt and how many credit applications you have made recently.

They also assess affordability independently - they need to be satisfied that you can manage the repayments alongside your existing financial commitments. This became a regulatory requirement under FCA responsible lending rules introduced following the 2010 Consumer Credit Directive.

What is a credit score and how is it calculated?

Each credit reference agency - Experian, Equifax and TransUnion - produces a credit score using their own scale. Experian scores run from 0 to 999; Equifax from 0 to 1,000; TransUnion from 0 to 710. A higher score indicates lower risk to lenders. The main factors that affect your score are: payment history (the biggest factor), credit utilisation, length of credit history, types of credit held and recent applications.

You can check your score for free through Experian's free tier, ClearScore (Equifax data) and Credit Karma (TransUnion data).

What should I check before signing a loan agreement?

Before signing any credit agreement, confirm:

• The total amount repayable (not just the monthly amount)
• The APR and whether it is fixed or variable
• Whether there are early repayment charges if you want to settle early
• What happens if you miss a payment (late fees, default notices)
• Whether the agreement is regulated under the Consumer Credit Act 1974

Regulated agreements give you additional protections including a 14-day cooling-off period and the right to request an early settlement figure at any time.

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Frequently Asked Questions

What is a good APR for a personal loan in the UK?

For borrowers with a good credit history, personal loan APRs from mainstream lenders typically range from 5 to 10 per cent. Rates below 5 per cent are available to the most creditworthy applicants. If you are being offered rates above 20 per cent on a personal loan, this indicates your credit profile is being assessed as higher risk and it is worth checking your credit file before proceeding.

Can I borrow money with a bad credit score?

Yes, but your options are more limited and the interest rate will be higher. Some specialist lenders and credit unions offer products to applicants with poor credit histories. Credit unions in particular can offer more sympathetic lending than high-street banks; find your local credit union through the Association of British Credit Unions (ABCUL) at abcul.org. Avoid high-cost short-term lenders (formerly known as payday lenders) unless no other option exists, as their rates are extremely high.

What is the 14-day cooling-off period for a loan?

Under the Consumer Credit Act 1974, you have 14 days from signing a regulated credit agreement to cancel it without penalty. You must repay any funds already drawn down, but you owe no interest or fees for the short period you held the money (beyond the actual cost of borrowing for those days). This applies to most personal loans and credit cards but not to mortgages.

Does applying for a loan affect my credit score?

A full credit application creates a hard search on your credit file, which is visible to other lenders and can reduce your score by a small number of points temporarily. Multiple hard searches within a short period signal financial stress to lenders. Use eligibility checker tools - which use soft searches - to assess your chances of approval before making a full application.

What happens if I miss a loan repayment?

Missing a payment typically results in a late payment fee and a missed payment marker on your credit file. This marker stays on your file for six years. If you miss several payments, the lender may issue a default notice, giving you 14 days to bring the account up to date. A registered default remains on your file for six years from the date of default. If you are struggling to make repayments, contact the lender before missing a payment - most lenders have hardship teams and can agree a temporary payment plan.