Personal loans, credit cards and payday loans

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Loans, otherwise known as credit, let you spend money and pay it back over a period of time. Loans usually come with interest which means you can end up paying back more than you borrowed. The percentage of interest can depend on the type of loan, period over which it will be paid back, and your credit rating. Someone with a lower credit rating may need to pay more interest on a loan than someone with a good credit rating. You need to be 18 or over to apply for any kind of credit.

Bank loans

Bank loans are also known as personal loans. You can apply for one through the bank with which you have a current account. You usually borrow an amount of money over a set period with a fixed rate of interest. For example, £1,000 over one year with 9% interest.

Credit cards

Credit cards can be a quick and easy way to pay for something before you have the money, and some have 0% interest for a year or two, meaning you only pay back what you have borrowed. However, once this 0% interest offer ends you could end up paying at least 15% interest. You normally need to pay back a minimum amount of money each month. If you do not make this minimum payment you may be charged and end up owing even more money. A benefit to owning a credit card is that the company you have a credit card with protect your money against fraud, faulty items or the company going bankrupt. For example, if you buy an expensive item on a credit card but the shop goes bankrupt and does not send your item, the credit card company will refund you.

Payday loans

Payday loans can quickly lead to debt that spirals out of control. They are often advertised on TV, and their main selling point is how quickly and easily you can be accepted for a loan, even if you are in debt or have a poor credit rating. They often charge extremely high rates of interest, sometimes 1000%, so can push you even further into debt. If you are tempted to take out a payday loan to pay for existing debts, speak to a debt advisor at Stepchange first. Taking out a payday loan could just cause your debt problem to get worse. You can also use Stepchange’s payday loan calculator to see how quickly the debt can escalate.