Loans: The basics

Working out what you need

Borrowing from a bank or building society

Borrowing from other companies

Borrowing from other companies

The information in this guide was last updated on 26/02/2014

It’s not just banks and building societies that can loan you the money for the things you need.

Specialist finance

If you’re buying a car, holiday or even white goods, the seller may offer to loan you the money for the purchase.

The loan is usually provided by a bank and you’ll need to pay it back – along with the interest – in instalments.

Some companies will also offer a 0% finance deal so it could be a good option if you think you can pay most or all of the money back before the deal ends - once it does the APR could be much higher than a personal loan.

Store cards

These work much in the same way as credit cards but are branded by a particular store and can only be used in that shop.

They tend to have a higher interest rate than a credit card or loan, although some stores do offer discounts when you buy something using their own store card.

Like credit cards, they can be a useful short-term solution but in the long run they can end up being very expensive if you keep a constant balance rather than paying your debt off regularly.

Payday loans

Payday loans are small, short-term unsecured loans. There are many of these on the market and payday loans have received a lot of press attention in recent years.

These can be very expensive and the APR is typically several thousand percent. While payday loan companies argue that they are only meant to be used for a very short time, there’s often nothing stopping you using an overdraft or much cheaper loan if you have this facility available.


If you can’t borrow using an overdraft or personal loan, there may be other options:

  • a credit union – these specialise in lending small amounts and are often aimed at helping people who can’t access finance elsewhere
  • if you receive benefits, you may qualify for an interest-free Budgeting Loan through Jobcentre Plus. These can help pay for essentials such as rent, clothes or hire purchase debt. You can find out more about Budgeting Loans from GOV.UK .

If you do borrow from a payday loan company, try to make absolutely sure you pay back your loan when it’s due. The high interest rate means that if you ‘roll over’ any debt it can mount up and quickly become unmanageable.

Credit Unions

These are non-profit businesses that can lend small amounts to their members, with their APR capped by law at 26.8%. However you may need to be a member to take out a loan through them. Members are normally required to have something in common such as being part of the same trade union or belonging to a particular organisation.

Islamic finance

Some banks and other organisations offer Sharia-law-compliant finance. It’s most commonly available for house purchases, as an alternative to a traditional mortgage, and there are two main types of plan:

  • Ijara – a leasing plan where part of your monthly payment is held by the bank towards buying your home at the end of the term

  • Diminishing Musharaka – a co-ownership agreement where you buy out the bank’s share of your home over time.

For more on Islamic finance, see the Money advice service.

Can you afford it?