When most people need to borrow, they take whatever's put in front of them. The car dealer offers PCP, so it's PCP. The kitchen company offers finance, so it's their finance. The phone shop bundles the handset into a contract, so that's how the phone gets paid for.
It's easy, and that's the problem. The easy option is rarely the cheapest one. The company selling you the thing has every reason to make the finance convenient, and no reason at all to make it cheap.
So here's how the main loan types work, where each one bites, and what I'm doing about my own borrowing right now.
What I'm Doing Right Now
I've got two bits of borrowing on the go.
The first is the finance on the windows and doors I had fitted to the house. It was arranged through the installer, it's charging 14.9% APR, and I don't want to keep paying that.
The second is a car. The obvious route is a PCP deal, but I do a lot of commuting miles, and PCP isn't built for that (more on why below). A personal loan usually comes in at a lower APR anyway.
So I'm looking at one personal loan from First Defence Finance, one of the forces credit unions, to pay off the windows finance and buy the car outright. One lower rate instead of two higher ones, and a car that's mine from day one with no mileage limit.
That's the whole point of this dit: don't just take the finance that comes with the thing you're buying. Shop around. Look at personal loans, look at credit cards, and look at whether your existing debts could be combined onto something cheaper.
The Main Types of Borrowing
Personal Loans
You borrow a fixed amount, usually £1,000 to £25,000 or more, and pay it back in fixed monthly instalments over an agreed term, often one to seven years. It's unsecured, so nothing you own is at risk if things go wrong, though your credit file will be.
Where it bites: the rate you see advertised isn't necessarily the rate you'll get. More on that below.
Credit Cards
Flexible, and at 0% they're the cheapest borrowing there is, as long as you clear the balance or move it before the promo ends. I've covered how I do that in The 0% Shuffle.
Where it bites: once the 0% ends, standard rates are often 25% APR or more. Cash withdrawals are worse.
Overdrafts
Handy for a few days' shortfall before payday. Most banks now charge a single rate, often around 35-40% APR.
Where it bites: it's very easy to end up living in your overdraft permanently, and at that rate it's one of the most expensive ways to borrow.
Car Finance: HP and PCP
With Hire Purchase (HP), you pay a deposit and then fixed monthly payments, and the car is yours after the last one. With Personal Contract Purchase (PCP), the monthly payments are lower because you're only paying off part of the car's value. At the end you either hand it back, or pay a large final "balloon" payment to keep it.
With both, the car belongs to the finance company until you've paid everything. You can't sell it without settling the finance first.
Where it bites: PCP comes with an annual mileage limit, and every mile over it is charged when you hand the car back. If you commute a long way, travel home on weekends, or get posted somewhere new halfway through the deal, that adds up fast. Those low monthly payments can also hide a high total cost.
With a personal loan, you buy the car outright. The monthly payment is usually higher than PCP, because you're paying for the whole car, but there's no mileage limit, no balloon payment, and you can sell it whenever you like.
Retailer and "In-Store" Finance
Kitchens, sofas, windows, laptops. Some of it is genuinely 0%, and if it is, there's no reason to replace it. Plenty of it isn't, though, like my 14.9% on the windows.
Where it bites: watch for "buy now, pay later" deals where interest is charged from day one, backdated, if you haven't cleared the full amount by the end of the interest-free period.
Phone Contracts
A contract bundles the handset cost into your monthly bill, so you're borrowing for the phone without really noticing. Handset finance is often interest-free, but the bundled price can still cost more overall than buying the phone outright and taking a SIM-only deal.
Where it bites: compare the total over the full contract, not just the monthly figure.
Buy Now Pay Later (BNPL)
Klarna, Clearpay and the like split a purchase into a few interest-free payments. Since 15 July 2026, most BNPL lenders are regulated by the FCA, so they have to check you can afford it, and you can complain to the Financial Ombudsman if something goes wrong.
Where it bites: it's so easy that several small plans can quietly add up to a lot of monthly commitments. Missed payments can now show up on your credit file.
Homeowner (Secured) Loans
Borrowing secured against your house. Rates can be lower, and you can borrow more.
Where it bites: if you can't keep up the payments, your home is at risk. That's a very different level of risk from an unsecured loan.
Payday Loans
Short-term, high-cost loans. The FCA caps them at 0.8% a day in interest and fees, and you'll never repay more than double what you borrowed, but that's still very expensive.
Where it bites: almost always, there's a cheaper option. A credit union's small loans are one of them.
Combining and Refinancing Debt
If you've got several debts at different rates, it can make sense to pay them off with one cheaper loan. That's what I'm doing with the windows finance.
Before you do, check three things:
- The total cost, not just the monthly payment. A lower rate stretched over a longer term can still cost you more overall. Compare what you'd pay in total each way.
- Early settlement charges. You have a legal right to pay off most credit agreements early. The lender can charge a small fee, capped at 1% of the amount you repay early (0.5% if there's less than a year left), so ask for a settlement figure first.
- That the old debt stays paid off. Clear a credit card with a loan and then fill the card back up, and you're worse off than when you started.
Representative APR: Read the Small Print
The advertised "representative APR" only has to be offered to at least 51% of successful applicants. The rest can be offered more, depending on their credit file, how much they borrow and for how long.
Use eligibility checkers before you apply. They use a soft search, which lenders can't see, and many show the rate you're actually likely to get. A full application leaves a hard search on your file, so you don't want to apply to several lenders one after another. The Invisible Number explains why.
And if you change your mind after signing, you normally have 14 days to withdraw from a credit agreement, paying back only the money you borrowed and any interest built up in that time.
The Forces Credit Unions
A credit union is a not-for-profit, member-owned lender. Any profit goes back to members, rather than to shareholders. In Great Britain, the law caps what they can charge at 42.6% APR, and most charge far less than that.
Since 2015, the MOD's Joining Forces scheme has let service personnel save and borrow with three credit unions, with payments taken straight from your pay:
- First Defence Finance (part of Plane Saver Credit Union)
- Serve and Protect Credit Union
- Forces Finance (part of London Mutual Credit Union)
They're open to Regulars and Reservists, veterans receiving a forces pension, and family members. Defence civil servants can join too, paying by direct debit.
What they have in common: no early repayment fees, and interest worked out on the reducing balance, so as you pay the loan down you're charged less. Your savings with them are protected by the FSCS up to £120,000, the same as a bank. Some ask you to save a small amount each month as part of being a member. For where else to keep your savings, see Shop Around for Your Savings.
Repayments coming straight out of your pay is a big plus: you can't forget, and you'll never miss one. But it cuts both ways. Because borrowing is so easy, it's worth being honest with yourself about whether you actually need the loan.
Their products, rates and rules differ, so look at all three and compare them with what's out there on the high street before you decide.
Before You Borrow
- Do you actually need it, or could you save for it first? Common Sense Isn't That Common covers how I split my pay to make room for saving.
- Have you compared at least three options, not just the one offered at the till?
- Have you compared total cost, not just monthly payment?
- Have you used eligibility checkers before applying?
- Could you still afford the payments if something changed, like losing an allowance after a posting?
Buying a house? Forces Help to Buy is an interest-free loan from the MOD, and it's covered in From Grott to Gaff.
If It's Already Got On Top of You
Don't take out another loan to cover the last one. Talk to someone first. StepChange and MoneyHelper both give free, confidential debt advice. Your unit welfare team and the service charities can help too.
The Bottom Line
The finance offered with the thing you're buying is designed to be convenient, not cheap. Before you sign, spend half an hour looking at personal loans, credit cards and the forces credit unions. If you've already got debt on a high rate, see whether you could move it somewhere cheaper.
It's the same money either way. The only question is how much of it ends up with the lender.
This is based on personal experience and is for information only. It is not financial advice. Borrowing costs money, and you should only borrow what you can afford to repay.