Commercial Borrowing vs Student Loans

Once you understand how your student loan works, you can feel relatively relaxed about it: You only repay if you’re earning enough, and only for a maximum 30 years (for Loan Plan 2) or 40 years (on Loan Plan 5). However, it’s important to understand that commercial borrowing is VERY different, and you need to be cautious about taking out credit, overdrafts and loans. Debt must be carefully managed, so it does not lead to money worries later on. 
We explain the key differences between commercial borrowing and your student loan.
Commercial borrowing - money handover

Commercial Debt – Key Differences


    • With commercial borrowing, you need to repay everything you owe i.e. the original sum you borrowed + all the interest it accrues before you clear the debt + any lender’s fees and charges.
      There is no write-off period as with student loans.


    • You agree a repayment plan with the lender, which determines what and when you repay, and over what period you need to clear your debt. You have to keep up with repayments, whatever your financial circumstances. Otherwise you face hefty penalty charges plus escalating interest, which can lead to debt spiralling out of control.


    • Repayments are based on how much you owe, not on what you earn (as in the case of student loans). With commercial loans, your monthly repayments would depend on the amount of your outstanding debt, the length of time to clear it, and the interest rate.


    • Interest charges are not staggered according to income, which is how interest is charged on Plan 2 student loans once you leave university. Nor will they be equal to inflation (Retail Prices Index RPI) as in the case of Plan 5 student loans, meaning there is no real cost to the loan.
      Commercial rates are generally far higher than those charged on student loans. The interest rate may be fixed for the term of the debt (e.g. most personal loans). Or it might be a variable rate (e.g. credit cards and overdrafts), which fluctuates in line with the Bank of England base rate. In this case, a rise in interest rate will increase your monthly repayments and the overall amount you have to pay back.


    • Unlike student loans, commercial borrowing does appear on your credit file, so late repayments may adversely affect your credit rating and impact future borrowing.


    • Repayments are not automatically deducted before you receive your salary (via PAYE); you need to make arrangements for punctual repayments e.g. by Direct Debit.


    • You can’t necessarily pay off a loan early if you have spare cash; some apply lock-in clauses with penalty charges for early settlement.


Three quarters of young adults admit to making regrettable money mistakes in their first years of financial independence, with one in six claiming their debt has ‘spiralled out of control’

MoneyHelper (formerly Money Advice Service)


Managed well, commercial borrowing can help you to achieve important steps, whilst spreading the cost over longer periods (e.g. a mortgage for a home, loan to buy a car or grow a business). But you should never borrow to fund a lifestyle you can’t really afford. Poor borrowing decisions can lead to serious money problems with long lasting consequences, so get independent advice and make sure you’re well informed before you take on credit cards, store cards, personal loans or overdrafts (and avoid costly payday loans!)



Golden Rule

Don’t take on commercial debt unless you have a guaranteed income to keep up with repayments.
Only ever borrow what you can afford to pay back.

If you are having money problems, see Financial Support for where to get help.

Find out more about commercial borrowing:

Before You Borrow

Debt & Borrowing
Find out about the costs of borrowing, types of product & how to choose the right options, managing debt, credit rating & more


Find out more about your student loan:

Student Loans – The Lowdown


Why not to Stress over Your Student Loan right arrow