A loan means borrowing money from someone else; you have to pay the money back, and unless it is from a particularly kind friend or member of your family you will have to pay interest (see explanation of interest here).

(Student loans are a separate issue; you will almost certainly need to take one out if you go to university, and you will only have to repay them once you earn a certain amount – you can find an overview of how they work here.)

If you take out a loan from a bank or building society, you reach a formal agreement with the lender setting out the original amount you borrow, how long you have to repay the loan, and the interest rate. You have to pay back both the original amount and the interest on it. 

Loans can be useful if you want to buy something big and don’t currently have the money (a big holiday or a car, for example);  but remember that you will be required to make the agreed repayments for the agreed time (which may end up being a significant and unchangeable drain on your income); and you will end up paying much more back than you borrowed. So think very carefully about whether you do really need the item now, or whether it can wait until you have your own money to spend on it.

If you do decide to take out a loan, take some time to find the best deal for you; and make sure that you can afford all the loan repayments, including the interest, for the length of the loan. You will of course have to include all the loan repayments when doing your budgeting.

Have a look at our other banking and money pages:

Bank and building society accounts – current accounts
Managing money
Manage your money