As UK households borrow more money than ever before, one in five UK adults do not know the difference between a personal loan and a payday loan, new research from comparethemarket.com has revealed.

The price comparison website found that over one-quarter of UK adults overestimate the cost of taking out a personal loan and a further 20% believe personal loans are too expensive to pay back.

comparethemarket.com highlighted that the average APR of a credit card currently sits between 18% and 20%, and can reach as high as 30%, although by comparison, the average APR on many personal loans is around 2.9%.

The new findings, however, revealed that many people are unaware how low average personal loan APR rates can be, with 26% believing the average rate sits between 11% and 50%.

comparethemarket.com director of money, John Crossley, said: “Personal loans are a sensible solution for many people, especially if you are looking to borrow a larger amount of money for a one-off purchase or project.

“For borrowers who want the discipline of making a fixed monthly repayment, personal loans can be preferable to a credit card where you have the flexibility to pay what you like every month, as long as it is above the minimum payment. In many cases, personal loans also have lower interest rates than credit cards.”

comparethemarket.com – whose research was conducted by Populus in a survey of 2,080 adults – also found 58% of surveyed adults had admitted they had no idea what their credit score was, and 82% said they had never researched how much they could borrow via an online soft checker before applying for a personal loan.

Furthermore, 29% of surveyed borrowers said they were not confident of being accepted for a loan if they were to apply – comparethemarket.com suggesting the benefits of soft checking eligibility before applying for a loan are being missed by many people looking to borrow responsibly.

“When applying for any sort of credit, it’s important to take the time to understand how likely you are to be accepted,” Crossley added.

“Repeated credit checks can damage your credit score but completing a soft check online will give you an idea of how much you can responsibly borrow without putting a black mark against your name.

“Interest rates can vary significantly between providers, so it is always a good idea to shop around for the most competitive loan which offers the best deal.”

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