Loans

A loan is money you borrow and repay over an agreed period, usually with interest and sometimes with fees on top. In the UK the main types are unsecured personal loans, secured loans tied to your home or car, hire purchase and PCP car finance, guarantor loans, and short-term high-cost credit such as payday lending. Each works differently, costs different amounts and carries different risks, and each is subject to different rules.

The law that governs most consumer borrowing is the Consumer Credit Act 1974, which sets out what lenders must tell you, what rights you have to cancel or end agreements early, and what happens if things go wrong¹. Lenders themselves must be authorised by the Financial Conduct Authority (FCA), the UK's financial services regulator, which sets rules on affordability checks, caps on high-cost credit and how firms must treat customers².

Types of loan and how each one works

Loans divide first into two families: secured and unsecured. A secured loan is tied to something you own, so the lender can take that asset if you do not repay. An unsecured loan is not tied to any asset, and the lender relies on your promise and your credit history instead. Both kinds of lender will look at your credit history to decide whether to lend to you⁷.

Unsecured borrowing includes personal loans, student loans, overdrafts and credit cards⁷. Secured borrowing includes mortgages and remortgages, loans secured on your home, and logbook loans, which are secured on your vehicle. A logbook loan works by the lender taking ownership of your vehicle, normally a car, from the start of the loan until you have paid the money back: you keep using the car, but the lender can take and sell it if you do not repay⁸. Logbook loans are regulated by the Consumer Credit Act, but they are among the riskiest forms of credit for the borrower, because you often pay back more than double what you borrow and the vehicle can be seized⁹.

Beyond that basic split, credit comes in many shapes: hire purchase and PCP for cars, guarantor loans where someone else backs you, payday loans for very short terms, home credit collected at your door, and buy now pay later at the checkout. The sections below take the main types in turn. If you want the full list at a glance, types of loan covers the detail, and how personal borrowing works explains the mechanics of an agreement.

Personal loans: fixed borrowing up to around £25,000

A personal loan is a fixed amount borrowed and repaid in instalments over an agreed term. You can usually borrow between £1,000 and £25,000, although loans for as much as £50,000 are available from some lenders³. The loan is normally unsecured, so it is not tied to your home or any other asset, and the interest rate and monthly payment are usually fixed for the term, which makes the cost predictable.

Because the borrowing is fixed and unsecured, a personal loan suits planned spending: a car, home improvements, or consolidating existing debts into one payment. It does not suit open-ended or small purchases, where a credit card or an arranged overdraft may work better, and it is not the same as borrowing against your home, which is cheaper per pound but puts the property at risk. Secured versus unsecured borrowing compares the two side by side.

The cost of a personal loan is expressed as an APR, which folds the interest and certain fees into one yearly figure. The rate you are actually offered depends on your credit history, how much you borrow and for how long, and it may differ from the advertised representative rate. How loan interest is calculated and loan APR explained cover how the numbers work, and loan fees and charges covers arrangement fees and other costs.

Two things to check before signing are the total amount payable over the term and the rules on paying the loan off early. Early settlement usually reduces the interest you owe, though lenders may apply a small charge. Paying off a loan early explains settlement figures. If you are consolidating debts, be aware that spreading repayment over a longer term can lower the monthly payment but raise the total cost: debt consolidation loans and consolidation loan or free debt advice set out the trade-offs.

Payday loans: capped at double what you borrow

A payday or pay cheque loan is a short-term, high interest, unsecured loan that you get in return for your pay cheque or proof of your income². The loan amount is small, perhaps only a few hundred pounds, and it must be repaid by the time you receive your next regular pay cheque, usually within 30 days of the loan being made². Rates higher than 1,000 per cent APR are common, so the cost per pound borrowed is far higher than on a personal loan².

Payday lending is legal but tightly capped. The rules limit the total cost, how often a loan can be rolled over, and what a lender must do before lending²:

• Total cost cap of 100 per cent: you will never have to pay more than twice the amount borrowed, counting interest and fees²
• Interest and fees capped at 0.8 per cent per day of the amount borrowed²
• Default fees capped at £15.00 if you do not pay back the loan on time²
• A loan must not be rolled over more than twice²
• The lender must check your creditworthiness before giving you a loan, rolling one over, or increasing the amount of credit²

Repayment is usually collected by direct debit or a continuous payment authority on your bank account, or by a post-dated cheque cashed on the due date². A continuous payment authority lets the lender take payments repeatedly, and you can cancel it directly with your bank: how to stop a continuous payment authority explains the steps.

Because of the cost, payday loans tend to suit only very short, one-off gaps in income, and even then cheaper alternatives often exist. Payday lending and high-cost short-term credit covers the market in full, the payday cost cap explains the cap in detail, and cheaper alternatives to a payday loan and payday lender or credit union loan set out the options. If you already have payday debt you cannot repay, what to do if you can't repay a loan is the place to start.

Guarantor loans put a second person on the hook

Some lenders will only provide a loan if another person, for example a friend or relative, guarantees to make the payments if the borrower does not¹⁰. A guarantor is someone who "guarantees" a loan for someone else: they agree to pay back the loan if the other person cannot⁴. In practice the person guaranteeing the loan is jointly responsible for dealing with the debt, and one person has to pay if the other cannot¹¹.

Guarantor loans exist mainly for people whose own credit history would not get them credit elsewhere. The creditor agrees to lend the money based on the guarantor being able to repay the loan in full¹¹, which tells you where the risk really sits. In some cases the loan may even be secured against the guarantor's property¹¹.

The rules around who can be a guarantor are strict:

• The guarantor usually must not be financially connected to the borrower, such as a spouse or partner¹²
• The guarantor needs a separate bank account to the borrower⁴
• The lender might ask for proof that the guarantor is working, proof of income, or that the guarantor is a homeowner⁴

The money is usually paid into the guarantor's bank account, who then forwards it to the borrower¹². If the borrower later enters an arrangement with creditors, formal or informal, the loan company will default the loan and contact the guarantor to maintain the original repayments¹².

Guarantor loans and being a guarantor covers the product in full, credit checks on a guarantor explains what the lender looks at, and what a guarantor pays when the borrower misses payments sets out the exposure. If a loan was unaffordable from the start, complaining your guarantor loan was unaffordable explains the complaint route.

Car finance: hire purchase or PCP

Most car finance in the UK is one of three things: hire purchase (HP), personal contract purchase (PCP) or personal contract hire (PCH). With HP you might pay an initial deposit, then repay the balance in instalments over a set period, and at the end you own the car⁶. With PCP you might also pay a deposit and make monthly payments, but these are typically lower because you are only financing part of the car's value; at the end of the term you can either return the car, pay a final payment to keep it, or trade it in⁶.

The key fact on both is ownership. When you buy a car with hire purchase or a conditional sale agreement, the finance company owns the car until you have made the last payment⁵. The same is true on PCP: the finance provider still owns the car⁵. Experian puts it plainly: "you do not own the car until the final payment is made"¹³. The finance is normally from a company separate to the garage or dealership⁵.

HP spreads the full cost; PCP finances only part of the value, with a choice at the end.

PCH is leasing rather than buying: you never own the car, and at the end you simply hand it back. It is not generally possible to terminate a PCH agreement early, and if you do, you may need to pay the full amount remaining on the lease⁶.

Because the finance company owns the car during the agreement, you cannot sell it without permission, and a private sale is not legally permissible while the finance is outstanding⁶. With a personal loan, by contrast, you own the car from day one and can sell it at any time⁵. Car finance or a personal loan for buying a car? compares the two routes, and can I sell a car that is on finance? answers the question directly.

The section pages cover each product in detail: hire purchase, PCP, conditional sale, personal contract hire, motorbike finance and how car finance works overall.

Who can borrow: age and affordability checks

Before any lender gives you credit, it must check that the loan is affordable for you. Payday lenders, for example, must check your creditworthiness before they give you a loan, roll one over, or increase the amount of credit². Both secured and unsecured lenders look at your credit history to decide whether to lend⁷. The check is not a formality: lending without a proper affordability check can be grounds for a complaint, which complaining about an unaffordable loan explains.

What the lender looks at goes beyond your credit score. In the mortgage market, all potential borrowing is subject to affordability checks and credit status, and the outcome depends on regular commitments, the type of pay you receive, self employment, the deposit, your age, borrowing beyond retirement date and the lender's own criteria¹⁴. The same principles shape other lending: a lender wants evidence that the repayments fit your income after your existing commitments.

Your credit history matters, and it is not fixed: it records what you have borrowed and how you have repaid. Loan affordability checks: what lenders must check explains the process, how loans affect your credit file covers the record a loan leaves, and credit scores and credit reports explains the file itself. If your history is poor, getting a loan with a poor credit history and near-prime and subprime lenders set out the options and their costs. People on benefits can borrow in some circumstances: getting a loan while on benefits covers what applies.

One point worth knowing: if you are financially linked to someone, for example as a joint account holder, a lender can have full access to your credit file in the same way it could if it were you applying for credit¹⁵. Joint loans: how borrowing in two names works explains what linking means.

Your rights under the Consumer Credit Act

The Consumer Credit Act 1974 is the main law governing consumer credit agreements, covering what lenders must tell you before you sign, how agreements are formed and ended, and the remedies when things go wrong¹. The Act is up to date with all changes known to be in force on or before 28 September 2026¹.

Among the practical rights the Act gives you:

• Written information and a copy of the contract. Payday lenders, like other consumer credit lenders, must give you written information and a copy of the contract you have signed².
• Early settlement. You can usually pay off a loan early and get a reduction in the interest you would have paid: paying off a loan early covers settlement figures.
• Claims against the lender when a financed purchase goes wrong. Under section 75A, if the debtor under a linked credit agreement has a claim against the supplier for breach of contract, the debtor may pursue that claim against the creditor where certain conditions are met¹⁶. Section 75 on loans, car finance and point-of-sale credit explains when this applies.
• A refund of most of a broker's fee. Under Section 155 of the Consumer Credit Act 1974, customers are entitled to a refund of all but £5 of a credit broking fee if they have not taken out a loan found by the broker within six months¹⁷.

Your rights under the Consumer Credit Act covers the Act in full, and cancelling linked credit when you return the goods explains one of its less-known corners.

Ending a hire purchase or PCP agreement early

The Consumer Credit Act gives you a statutory right to terminate an HP or PCP agreement at any time: this is called Voluntary Termination (VT)⁶. It is a right that belongs to you by law, not something the finance company can refuse, though it comes with conditions.

The main condition is the half-way point. You can return the car, ending the agreement, but you will not get any of the payments you have made back. If you have paid more than half of the agreement, there is normally nothing more to pay; if you have paid less than half, ending early normally means paying up to 50 per cent of the total amount payable⁵. If you end the agreement, you will not get back any of the payments you already made¹⁹.

What you owe when you hand the car back depends on how much of the total you have paid.

The right applies to HP and PCP, but not to everything. Some HP agreements are not regulated by the Consumer Credit Act, mainly older, high-value agreements or agreements taken out by a business, and you do not have a right to end these early¹⁹. You cannot end a logbook loan early⁵. On PCH leasing, early termination is generally not possible, and doing so may mean paying the full amount remaining on the lease⁶. On PCP, you can return the car early if you find you cannot afford the payments, but you could have more to pay if you do this⁵.

Before ending any agreement, check whether it includes Payment Protection Insurance: you may be able to make a claim on the insurance depending on the circumstances¹⁹. Voluntary termination: ending car finance early covers the process step by step, and voluntary termination or early settlement compares handing the car back with paying the finance off.

What happens if you miss repayments

Missing loan repayments has consequences that build in stages. On car finance, continuous non-payment can result in formal notices of arrears, and after 3 or 4 missed payments in a row, a default notice⁶. A default notice is a formal step before the lender can end the agreement or take enforcement action, and it is recorded on your credit file, where later lenders will see it.

What the lender can do next depends on the type of loan. On unsecured lending, the lender can pass the debt to a collection agency or take court action, but it cannot simply seize your possessions. On hire purchase, the finance company can repossess the car, because it owns it. On a logbook loan, the lender owns the vehicle from the start and can take and sell it if you do not repay⁸. On a mortgage or a loan secured on your home, if you miss repayments and cannot agree a repayment plan, the lender might start court action to repossess your home²².

There are limits on enforcement. Bailiffs can only take goods that belong to you, which means they cannot take goods on HP agreements, because those goods still belong to the lender¹⁹. Bailiffs also cannot take things you need, such as your clothes, cooker or fridge, work tools and equipment worth less than £1,350, or someone else's belongings²³.

Two things people fear most do not happen. You cannot be sent to prison for not paying a loan, though the court can take further action in rare situations if you do not follow its instructions⁵. And a loan from a loan shark, an unlicensed lender, is not legally enforceable, so it is very unlikely they will take you to a civil court²⁴; not repaying such a loan is not a crime, and threats of prosecution and prison cannot lawfully be made²⁵.

If you are struggling, the most useful step is to talk to the lender early and to get free debt advice. What to do if you can't repay a loan, what happens if you can't pay your car finance, can a finance company repossess my car? and missing secured loan repayments and your home cover the specific situations, and debt: a complete guide gathers the help available.

Where legal protections do not apply

The protections on this page have edges, and knowing where they stop matters as much as knowing where they apply.

• Business borrowing. Complaints by guarantors of loans to businesses are not covered by the ombudsman's guarantor loan rules¹⁰, and some HP agreements taken out by a business fall outside the Consumer Credit Act's early termination rights¹⁹.
• Unlicensed lenders. A loan from a loan shark is not legally enforceable²⁴, which cuts both ways: you cannot be pursued through the courts, but you have no contractual protections either. Report illegal lenders rather than borrowing from them: loan sharks and illegal money lending explains how.
• High-value agreements. Some older, high-value HP agreements are not regulated by the Consumer Credit Act¹⁹.
• Credit insurance. Claims on credit insurance are not eligible for FSCS protection²⁶, so a failed insurer may leave a claim unpaid.
• Buy now pay later. BNPL has been brought under FCA regulation for some agreements, but the position differs by product and agreement type; the FCA's own guidance on buy now pay later sets out what is covered²⁷. Is buy now pay later regulated by the FCA? covers the detail.

Who provides loans in the UK

Loans come from several kinds of provider, and the differences between them change what you pay and what protection you have.

Banks and building societies provide most personal loans. They are authorised by the FCA, and money held with them as deposits is protected by the FSCS; borrowing itself is not protected in that way, because a loan is money you owe rather than money held for you²⁸. The main high street names are listed in banks and building societies, and the wider field of lenders in lenders and card issuers.

Specialist and subprime lenders lend to people whose credit history blocks the mainstream route, at higher cost. Near-prime and subprime lenders explains this market.

Payday lenders must be authorised by the FCA, which publishes a list of licensed lenders on the FCA register².

Car finance companies provide HP, PCP and leasing, normally as companies separate from the dealership⁵. Car finance companies: who lends when you buy a car on finance names the main firms, and how to find out who your car finance was with helps with older agreements.

Credit unions and community lenders offer a not-for-profit alternative, often to people excluded from banks. Credit union loans, credit unions: a complete guide, do credit unions charge fees on loans, community lenders (CDFIs) and affordable credit and the No Interest Loan Scheme cover them.

Brokers do not lend at all: they find loans and charge a fee. Direct lenders and loan brokers explains the difference, and credit broker fees and the APR covers what brokers may charge. The ombudsman commonly sees complaints about being charged a fee for finding a loan, sometimes without any loan being offered, fees not refunded when no loan was taken out, and being misled or not correctly informed about the loan's terms or cost²⁹. Brokers must tell you whether they are a broker or lender, their legal name, the fees to pay and when and how, the details of the loan offered, and whether your details might be passed to other companies²⁹.

Checking a lender and getting help

Before borrowing, check the firm. The FCA provides a Firm Checker tool to help consumers check whether financial services firms are authorised and have permission to sell products and services³⁰. Search the firm by name, select 'Borrowing money, including credit card lending and credit information', and check the firm is 'Authorised' with permission to 'Lend you money on an unsecured basis'²⁷. You can check whether a provider is authorised on the FCA register²⁸, which also publishes contact details for regulated financial businesses³¹. If you want to check whether a firm is legitimate or report a possible scam, the FCA is the go-to contact³¹, and the ombudsman likewise advises using the FCA's Firm Checker to confirm a firm is authorised and help avoid scams²⁶.

If something goes wrong, complain to the lender first, using its official complaints process. If it does not resolve the matter, the Financial Ombudsman Service can look at complaints about credit and borrowing, including guarantor loans, logbook loans, car finance and credit broking¹⁰. The ombudsman is free to use and can order a firm to put things right, including refunds and compensation. Complaining about a lender or finance company explains the process, and how to complain is the ombudsman's own route.

For free help with debt itself, independent charities and services are available at no cost: StepChange, whose guidance is cited throughout this page, and MoneyHelper, which explains guarantor loans and other products in plain terms⁴. In Northern Ireland, Advice NI publishes guidance on payday, guarantor and doorstep loans and on car finance¹². Debt: a complete guide gathers the free options, including consolidation loan or free debt advice.

One live issue is worth knowing about. A redress scheme was published by the FCA on 30 March 2026 for motor finance customers affected by commission arrangements, and a legal challenge to the scheme is scheduled to be heard in December 2026 or February 2027, during which scheme timescales are suspended³². The motor finance redress scheme explains who may be due compensation and what happens next.