What Borrowing Options Are Available in the UK? A Guide to Types of Finance
Published 25th of October 2012·Updated 7 April 2026
Reviewed by: Reviewed for accuracy April 2026
UK borrowers have more credit options than ever, from straightforward personal loans at major banks to peer-to-peer lending platforms and credit unions. The right choice depends on the amount you need, how long you need it for, your credit profile and what you are using the money for.
Short Summary
Borrowing always has a cost. Interest, fees and charges mean you will repay more than you borrow - the key is to minimise that cost by matching the right product to your need.
Secured borrowing (tied to your home or another asset) generally offers lower interest rates but carries the risk of losing that asset if you cannot repay. Unsecured borrowing costs more in interest but does not put your property at risk.
Your credit score affects which products you can access and at what rate. Checking your score for free through Experian, ClearScore or Credit Karma before applying helps you target the right products and avoid hard search rejections.
If you are borrowing to manage existing debt rather than fund a specific purchase, free debt advice from StepChange or Citizens Advice is usually a better starting point than taking out more credit.
Personal loans
A personal loan is an unsecured, fixed-term loan from a bank, building society or specialist lender. You borrow a fixed amount (typically £1,000 to £25,000), repay it in fixed monthly instalments over a set term (usually one to seven years), and pay a fixed interest rate. This makes budgeting straightforward.
High-street lenders including Barclays, HSBC, Lloyds and Nationwide offer personal loans. Online and challenger lenders such as Zopa and Shawbrook often offer competitive rates. The APR you receive depends on your credit profile; the advertised "representative APR" is offered to at least 51 per cent of successful applicants.
Personal loans suit medium-term borrowing for a specific purpose: home improvements, a car purchase or consolidating existing debts at a lower rate.
Credit cards
A credit card gives you a revolving credit limit you can draw from as needed. If you pay the balance in full each month, you pay no interest. If you carry a balance, interest is charged at the card's purchase rate - typically 20 to 30 per cent APR for standard cards, though introductory 0 per cent offers can last 12 to 24 months.
For large purchases, a 0 per cent purchase credit card can be the cheapest way to borrow if you repay the balance before the offer period ends. For existing credit card debt, a 0 per cent balance transfer card moves the debt to a new card at no interest for a promotional period (transfer fees of 1 to 3 per cent typically apply).
Under Section 75 of the Consumer Credit Act, purchases between £100 and £30,000 on a credit card are covered jointly by the card issuer - useful protection for expensive goods or travel bookings.
Overdrafts
An overdraft allows you to spend beyond your account balance, up to an agreed limit. Since 2020, FCA rules require banks to charge a single annual interest rate (EAR) on all overdraft borrowing, making it easier to compare. Most high-street bank overdraft rates now sit between 19 and 40 per cent EAR, which is relatively expensive for sustained borrowing.
Overdrafts suit short-term cash flow gaps - covering a few days between paydays, for example. Using an overdraft as a medium-term lending product is expensive compared to a personal loan at a lower APR.
Mortgages
A mortgage is a large secured loan used to buy property. Repayment terms typically run from 10 to 35 years. The interest rate is either fixed (locked in for a set period, typically two to five years) or variable (tracking the Bank of England base rate or the lender's standard variable rate). Mortgage lenders include all major banks and building societies plus specialist brokers.
A mortgage broker - particularly a whole-of-market broker - can access deals not available directly to the public and is worth using for most mortgage applications. The Mortgage Market Review (2014) requires lenders to assess affordability rigorously before approving a mortgage.
Credit unions
Credit unions are member-owned, not-for-profit financial cooperatives. They offer savings accounts and loans to members, typically at more competitive rates than high-street alternatives. By law, UK credit unions cannot charge more than 42.6 per cent APR (3 per cent per month) on loans - far below many commercial short-term lenders. Many credit unions offer rates well below this cap.
Credit unions serve specific communities - geographic areas, professions or employers. Find your nearest credit union through the Association of British Credit Unions (ABCUL) at abcul.org.
Buy now, pay later (BNPL)
Buy now, pay later services - offered by providers such as Klarna, Clearpay and Laybuy - allow you to split purchases into instalments, often interest-free. These are useful for specific purchases if you repay within the interest-free period. However, missing payments can result in fees and, as of 2025, most BNPL products are being brought under FCA regulation, which will add new consumer protections.
BNPL can encourage overspending by reducing the immediate cost of a purchase. Track any BNPL agreements carefully and ensure payments are covered in your budget.
| Borrowing type | Typical APR | Suitable for | Risk level |
|---|---|---|---|
| Personal loan | 5-40% | Fixed-term purchases, debt consolidation | Low-medium |
| Credit card (0%) | 0% during offer, then 20-30% | Short-term purchases, balance transfers | Low if managed |
| Overdraft | 19-40% EAR | Short-term cash flow gaps | Medium |
| Mortgage | 3-6% | Property purchase | High (secured on home) |
| Credit union loan | Up to 42.6% (usually much less) | Those with limited credit options | Low-medium |
| BNPL | Usually 0% if on time | Spreading purchase cost | Low-medium |
Frequently Asked Questions
What is the cheapest way to borrow money in the UK?
For most people, a 0 per cent purchase credit card (repaid in full before the offer ends) or a competitive personal loan from a high-street or online lender is the cheapest route. Mortgages carry the lowest rates overall but are only available for property purchases. Credit unions offer good rates for smaller amounts, particularly for those with limited credit history.
Can I borrow money with bad credit?
Yes, though your options are narrower and the rates are higher. Credit unions, credit-builder credit cards and some specialist personal loan providers accept applicants with poor credit histories. Avoid high-cost short-term lenders unless no other option is available, as their total cost of borrowing is very high. Free debt advice from StepChange or Citizens Advice can help you explore all options.
Should I consolidate my debts with a personal loan?
Debt consolidation can reduce your total monthly repayment and interest cost if you consolidate at a lower APR than your existing debts carry. However, it only works if you do not accumulate new debt on the cards you have paid off. If the root cause of the debt is a spending or income problem rather than a high interest rate, debt advice is more appropriate than consolidation.
How do I compare loan options fairly?
Use the APR (Annual Percentage Rate) to compare the total annual cost across products. Also compare the total amount repayable (monthly repayment multiplied by number of months) to understand the full cost. Use eligibility checker tools on comparison sites to get indicative rates without making hard searches on your credit file.
Is peer-to-peer lending a good option for borrowers?
Peer-to-peer (P2P) lending platforms such as Zopa (which has since evolved into a bank) connect borrowers with individual investors. Rates can be competitive for borrowers with good credit. P2P lending is regulated by the FCA but does not benefit from the Financial Services Compensation Scheme (FSCS) protection that applies to bank deposits. As a borrower rather than an investor, your obligation is simply to repay - P2P loans work similarly to standard personal loans in practice.