Two loans for the same amount can end up costing very different sums, even when the monthly payments look similar. Understanding how the cost of credit is shown, and how each type of borrowing works, puts you in a much stronger position to choose well.
In this guide, V5 Solutions follows an example borrower as she compares her options. Along the way we explain APR, the total amount repayable and the strengths and weaknesses of each common type of credit.
Meet Priya: Comparing Ways to Borrow £3,000
Priya needs £3,000 to replace a broken boiler. Her credit history includes a couple of late payments from a few years ago, and she has around £400 in savings. She wants to know which type of credit would suit her and how to compare the offers she receives.
Before looking at lenders, Priya checks two things. First, can she afford a monthly repayment without falling behind on other bills? Second, is there any way to reduce the amount she needs to borrow, such as a grant, help from family or using part of her savings?
How Should You Compare the Cost of Credit?
Annual percentage rate (APR)
The APR expresses the yearly cost of borrowing, including interest and any mandatory charges, as a single percentage. Because every regulated lender must calculate it in the same way, it is a fair basis for comparing products. Advertised rates are usually "representative", meaning at least 51% of successful applicants receive that rate or lower.
Total amount repayable
The total amount repayable is everything you will pay back over the life of the agreement. Priya uses this to see the real cost in pounds. To show why it matters, consider two made-up offers for £3,000:
- Offer A: 24 monthly payments of £150, a total of £3,600.
- Offer B: 48 monthly payments of £90, a total of £4,320.
Offer B looks easier on the monthly budget, yet it costs £720 more overall. A longer term almost always means paying more interest in total.
What Are the Main Types of Borrowing?
Personal loans from banks and building societies usually offer the lowest rates to applicants with good credit records. With past late payments, Priya may not qualify for the best deals, but it is still worth checking eligibility tools that use a soft search.
Credit unions are member-owned, not-for-profit lenders. Their interest rates are capped by law and they often consider people that high street banks decline. Membership usually depends on where you live or work.
Credit cards can be inexpensive if the balance is cleared in full each month or during a 0% promotional period. They become costly if a balance is carried for a long time at the standard rate.
Overdrafts suit short, temporary shortfalls. Banks express overdraft costs as an interest rate with an APR, and the rate is often high, so they tend to be an expensive way to borrow over many months.
Secured loans against a vehicle, such as those provided by V5 Solutions, use your car as security. Loans range from £1,000 to £50,000, with terms between 18 and 60 months and interest fixed at the start, and we look at your vehicle's value and affordability, not just your credit score. This type of credit generally costs more than mainstream personal loans and puts the vehicle at risk if repayments are missed. You can learn how the process works on our how logbook loans work page and read our plain-English guide to logbook loans.
Which Option Might Suit Priya?
Priya decides to use £200 of her savings, keeping the rest as a small emergency buffer, and borrow £2,800. She checks whether a local credit union would lend to her and compares any personal loan quotes she can obtain with a soft search. For each offer she writes down the APR, the monthly payment, the term, the total amount repayable and whether she could settle early without a large charge.
The right choice will depend on what she is offered, but comparing the totals makes the decision far clearer than looking at monthly payments alone.
Where Can You Get Free Help?
This article is general information, not financial advice. If you are considering borrowing to keep up with existing commitments, speak to a free debt adviser first. Citizens Advice, StepChange and MoneyHelper can help you review your own situation, and there is no charge for their help. Our article on questions to ask before taking a logbook loan may also help.
Your car may be repossessed if you do not keep up repayments on a loan secured against it.
