Interest is the basic cost of borrowing the principal amount. APR (Annual Percentage Rate) is a more complete figure because it includes both the interest rate and any extra fees or charges. When comparing different loans, the APR is the best number to use to see which is truly cheaper.
Thinking of borrowing money for a car, home improvements, or to manage debt? We know the world of lending can feel complicated. Let's simplify it.
The information in this article is provided for general educational purposes only and should not be taken as financial advice. Everyone’s financial situation is different, and you should always consider seeking guidance from a qualified independent financial adviser or free, impartial organisations such as MoneyHelper or Citizens Advice before making decisions about credit or borrowing
The Building Blocks of Borrowing
Before diving into different types of loan, it’s helpful to understand a few key terms.
- Principal: This is the fixed amount or set amount you borrow. If you take out a loan for £5,000, the principal is £5,000.
- Interest: This is the cost of borrowing the money. Lenders lend funds, and in return, you pay it back with charged interest. The interest rate can be fixed or variable.
- APR (Annual Percentage Rate): This is one of the most important figures. The APR represents the total cost of borrowing over a year, including the interest and any other standard fees.
- Credit Score: Your credit score (or credit rating) is a number based on your credit history. Lenders use it to help them decide whether you can afford to repay a loan and what interest rate to offer. A soft search can check your eligibility without leaving a mark, but multiple formal applications in a short space of time could affect your credit score.
Types of Borrowing: Secured vs. Unsecured
Nearly all forms of borrowing fall into two main categories:
Secured Loans: A secured loan is tied to an asset you own. A mortgage is the most common example. If you fail to make repayments, the lender has the right to take the asset to recover what you owe.
Unsecured Loans: An unsecured loan is not backed by an asset. The lender makes their decision based on your personal circumstances and current financial situation.
Common Ways to Borrow Money
There are many different borrowing options available:
Mortgages: A long-term secured loan used to buy property. You might have an existing mortgage that you make monthly repayments on.
Credit Card: A flexible way to spend, but the interest can be high if you only make the minimum payment on your balance each month.
Overdraft: An arranged overdraft on your current account lets you spend more money than you have, up to an agreed limit. It’s a form of short term borrowing, best used for a short period only.
Personal Loan: With a personal loan, you borrow a set amount of money over a longer period or longer term. You pay back the loan in fixed monthly installments.
Discover more practical tips to manage your borrowing. Check out our Debt Consolidation page to find out more ways to simplify your repayments.
Final Thought
Looking to pay off credit card debt? If you’re looking to consolidate credit card debt and cut down on high interest, check your eligibility for Updraft, or download our app today.
Loans from 15.3% APR (25.9% APR Representative)
25.9% APR Representative based on a £10,000 loan over 60 months at 20.40% fixed interest p.a. Monthly repayment: £283.20. Total repayable: £16,992 (inc. £600 fee). Subject to status and affordability. Consolidating debt may increase the term and total amount repaid. All figures are representative and based upon an assessment of credit and affordability. Terms and conditions apply.
From 15.3% to 41.2% APR, £1,000–£25,000, over 2–5 years available.
Updraft Awards & Recognition
Recognised for helping borrowers take control of card debt.
Frequently Asked Questions
What is the difference between Interest and APR?
How does a 'soft search' protect my credit score?
A soft search allows a lender to check your eligibility for a loan without leaving a visible mark on your credit report. This means you can see your chances of approval and your potential interest rate without it affecting your score, unlike a "hard search" which occurs during a formal application.
Should I choose a secured or unsecured loan?
An unsecured loan is based on your personal circumstances and doesn't require you to put up an asset as collateral. A secured loan (like a mortgage) is tied to an asset you own, like your home. While secured loans often have lower rates, they carry more risk because the lender could take your asset if you fall behind on payments.
Why is only making 'minimum payments' on credit cards risky?
Credit card interest rates are often high. If you only pay the minimum balance each month, most of your money goes toward interest rather than the principal debt. This can lead to your balance reducing very slowly and you paying significantly more over a much longer period.