Imagine a friend lends you £10 so you can buy something today. Next week you give them £10 back and you are even. That is lending between friends.
Now imagine a company does it. They lend you £10 and ask for £11.50 back next week. That £1.50 is their reason for doing it at all — it is interest, the price of using their money. That is a loan.
The four numbers on every loan
All borrowing, from a £20 overdraft to a £300,000 mortgage, is described by the same four numbers. If you can find these four, you understand the deal:
- How much you borrow. Sometimes called the principal.
- The interest rate, usually shown as an APR.
- How long you have to pay it back — the term.
- The total you will repay. This is the one that matters most, and it is often the one printed smallest.
Longer is cheaper each month and dearer overall
Borrow £1,000 at 10% APR:
- Over 1 year — about £88 a month, roughly £1,055 repaid in total.
- Over 3 years — about £32 a month, roughly £1,162 repaid in total.
- Over 5 years — about £21 a month, roughly £1,275 repaid in total.
The five-year version has the friendliest monthly payment and costs £220 more. Adverts show you the monthly figure. Always find the total.
The main kinds of borrowing
| Type | What it is | Typical cost |
|---|---|---|
| Personal loan | A fixed sum borrowed and repaid in equal monthly amounts over a set period. | Lower, if your credit record is good |
| Credit card | A limit you can borrow up to and repay flexibly. Free if cleared in full each month; expensive if not. | Often 20–30% APR |
| Overdraft | Permission to let a bank account go below zero. | Often around 35–40% APR |
| Buy now, pay later | Splitting a purchase into instalments, usually with no interest — but with fees if you miss one. | 0%, until you are late |
| Payday loan | A small amount borrowed for a very short time at a very high rate. | Extremely high |
| Mortgage | A very large loan to buy a home, secured against the property, repaid over decades. | Lowest rates, longest term |
Why some loans cost so much more than others
The rate mostly reflects how likely the lender thinks they are to get their money back. A mortgage is cheap because the house can be taken away if you stop paying. A payday loan is expensive because there is nothing backing it and the people borrowing are often already in difficulty.
This produces one of the least fair things about money, and it is worth knowing early: the less money you have, the more expensive borrowing becomes. People who could most use a cheap loan are offered the dearest ones. That is not an accident or a conspiracy — it falls out of how risk is priced — but it is real, and it is why avoiding the expensive end matters so much.
How to spot a loan designed to catch you out
- The advert talks about speed, not cost. "Money in 15 minutes" is a promise about their process, not about your deal.
- The monthly payment is huge on the page and the total is not shown at all.
- There are fees for things that are not borrowing — arrangement fees, late fees, "top-up" fees that add to what you owe.
- They encourage you to borrow again before you have finished repaying the first one.
- It is easier to get than it should be. A lender who does not much care whether you can repay is not planning to make money from you repaying comfortably.
When borrowing is a reasonable idea
Loans are not villains. Borrowing is sensible when the thing you are buying lasts longer than the loan, and when not borrowing would cost you more.
- Usually sensible: a home you will live in for decades; training that raises what you can earn; a car you genuinely need to get to work.
- Usually not: a night out; a holiday; something you will have finished with long before you have finished paying for it; covering a gap you already know will still be there next month.
The test is simple. If the thing will be gone before the debt is, think very hard.
Borrowing and age in the UK
You cannot legally take out a loan, a credit card or an overdraft in the UK until you are 18. Any credit agreement signed by someone younger is not enforceable against them. This is why there is no such thing as a credit card for children, whatever a website might imply — cards aimed at under-18s are prepaid or debit cards, which spend money you already have rather than money you are borrowing.
What builds up before you are 18
Nothing you do before 18 creates a borrowing record, because you cannot borrow. What matters is what happens straight after — the first mobile phone contract, the first bank account, the first overdraft. Paying those on time, every time, is what makes borrowing cheaper for the rest of your life. The habit is worth more than the amount.
Questions people ask
- What is a loan in simple terms?
- A loan is money you use now and pay back later, plus extra. The extra is interest — the price of using someone else's money for a while.
- Why do you pay back more than you borrow?
- Because the lender cannot use that money while you have it, money loses a little value over time as prices rise, and there is a risk you do not pay it back. Interest covers all three.
- Can a child get a loan or a credit card in the UK?
- No. You must be 18 to take out a loan, credit card or overdraft in the UK, and a credit agreement signed by someone younger cannot be enforced against them. Cards for under-18s are prepaid or debit cards, which spend money you already have.
- Why are payday loans so expensive?
- They are small, very short, and have nothing backing them, so the lender treats them as high risk and prices them accordingly. The unfair result is that borrowing tends to cost most for the people who can least afford it.
- Is borrowing money always a bad idea?
- No. Borrowing is reasonable when what you are buying lasts longer than the loan — a home, training that raises your earnings, a car needed for work. It goes wrong when the thing is gone long before the debt is.