UK Credit & Debt Types: A 2023 Guide

When dealing with debts, it’s important to know the different types of credit and their implications. Especially in an ever-changing financial landscape like we’re seeing here in the UK.

To help you better understand the different types of credit and debt in the UK in 2024, we’ve put together this comprehensive guide that covers the various forms and important things to consider.

Personal Loans:

Personal loans are unsecured loans that can be used for various purposes, such as home improvements, debt consolidation, or unexpected expenses. These loans are unsecured debts meaning they are typically not protected by a guarantor or secured against collateral assets (such as a house) These loans usually have fixed interest rates and require monthly repayments over a set period. Unlike credit cards, a personal loan offers a one-time payment amount in a lump sum.

It’s essential to compare loan offers from different lenders to find the best interest rates and terms. As personal loans come with set terms, it’s important to know that you can afford the repayments before taking out the loan. You run the risk of repaying larger amounts of interest and potential late payment charges should you fall behind on your repayments.

Credit Cards:

Credit cards allow you to make purchases on credit or transfer existing balances and pay back the balance over time. If you don’t pay off your balance in full each month, you’ll accrue interest on the remaining amount.

Credit cards often come with promotional offers, such as 0% interest on purchases or balance transfers, but interest rates can be relatively high once these offers end.

Credit cards can be a good way to spread out the cost of large purchases and can come with rewards such as cashback offers, as well as improving your credit score. However, as with personal loans, it’s important to make sure you can pay off the balance before committing to using one.

Once any promotional offers have expired, you should set up a direct debit to clear your balance in full each month to ensure you avoid high interest charges.

Overdrafts:

An overdraft is a short-term borrowing facility, linked to your current account, allowing you to spend more money than you have in the account, up to an agreed limit. Overdrafts can be useful for covering temporary cash flow issues but can become expensive if used long-term, as interest rates and fees may apply.

Different current account types and banks offer interest free overdraft options and allowances that can provide a safety net, so it’s worth looking into which banks offer which options if having this feature is important to you.

Payday Loans:

Payday loans are short-term, high-cost loans designed to tide you over until your next payday. While they may seem like a quick-fix solution for immediate financial needs, payday loans often come with extremely high interest rates and fees, making them a risky and expensive option in the long run.

If there is any doubt that you won’t be able to pay the loan back in full, it’s important to consider alternative borrowing options. For people struggling to make ends meet, there are other options to consider such as credit unions or community development institutions, who may be able to offer safer alternatives payday loans.

Mortgages:

A mortgage is a long-term, secured loan used to purchase property. These loans are often issued by banks and can range in length from 10-30 years depending on payments and initial loan amount. Often, when taking out a mortgage, an initial lump sum between £10k – £30k is needed as a deposit or down payment towards the overall payment of your house. This amount can vary but could equate to 10% of the overall price of the property, meaning a house worth £200,000 would require an initial deposit of £20,000. Though these amounts are not fixed and can vary or be negotiated based on the specifics of your agreement.

In a mortgage agreement, the property serves as collateral, and if you fail to make repayments, the lender has the right to repossess your property if you cannot make up the outstanding amount.

There are various types of mortgages available in the UK, such as fixed-rate, variable-rate, and tracker mortgages. The right option for you can depend on many factors such as changing markets and financial stability, and it’s important to research and compare different mortgage options to find the best option for your financial needs.

Student Loans:

In the UK, student loans are provided by the government to help cover tuition fees and living costs while attending university. These loans have relatively low interest rates and will only begin to be repaid once you start earning above a certain income threshold. This means that until you begin earning the required amount, you will not be forced to repay your student loan payments.

To find out more about repayment plans and threshold amounts, visit the GOV.UK website. After you reach the threshold amount, monthly repayments will be applied to your pay each month at a rate of around 6-9%. If at any point you fall below this repayment threshold payments will be paused until you again reach this set amount.

Student loans are repayable up to 30 years after graduation, after which point any remaining amount is forgiven and the debt is wiped.

Although student loans contribute to your overall debt, they have more favourable terms and conditions compared to other types of debt.

Car Loans:

Car loans are used to finance the purchase of a vehicle and can be secured or unsecured, depending on the lender.

Secured car loans typically have lower interest rates, as the vehicle serves as collateral, while unsecured car loans may come with higher interest rates. Interest rates on car loans can vary widely depending on the lender, your credit score and, of course, the price of the vehicle, with rates ranging from around 3% to 20% APR.

Typical car loan terms range from 12 months to 60 months or longer.

When looking to take out this type of credit, it’s worth being savvy and comparing lenders for different car loan offers to find the best deal for your circumstances.

Store Cards:

Store cards are a type of credit card offered by specific retailers, allowing you to make purchases on credit within their stores or affiliated retailers. While store cards often come with attractive discounts and promotional offers, such as money off your first purchase, loyalty points on your purchases that go towards future purchases and cashback offers, they typically have higher interest rates compared to standard credit cards.

It’s always worth being mindful of the potential costs associated with store cards and ensure that you pay off the balance in full each month to avoid accruing interest. Ensuring that you have the money to pay off the balance before repayments start.

Type of debt

Understanding the various types of debt in the UK is crucial for making sure you are making informed financial decisions and managing your debt effectively.

As the financial landscape continues to evolve in 2024, staying informed and seeking professional advice when needed can help you navigate your way through different borrowing options and choose the most suitable ones for your specific needs. Always remember to borrow responsibly, compare offers from different lenders, and prioritise paying off high-interest debt to maintain a healthy financial future.

MoneyPlus Advice offer debt advice to find out more click here or call 0161 837 4754 *all initial advice is free, however fees may be charged should you take out a service with MoneyPlus Advice.