Online-only challenger bank Revolut has announced customers will be able to access loans of up to £5,000 instantly.

The application will be made on the bank's smartphone app, and could reach your Revolut account in minutes.

The loans are for between £500 and £5,000 with repayments over one to five years at a representative 9.9% APR.

It says borrowers would pay on average half as much interest as at their bank.

Repaying a £1,000 loan over one year would cost a total of £1,052 at Revolut compared to £1,120 at a bank, it claims.

How it works

Once you’ve been approved for the loan the money is paid into our Revolut account, from which you can spend it in any currency of your choosing without fees.

Revolut has partnered with peer-to-peer firm Lending Works to provide the new service, meaning you are borrowing directly from individual lenders rather than from the banks, keeping interest rates low.

“The fact that anyone can now apply for credit from anywhere in the world in two minutes, get the money instantly and spend it with a Revolut card without fees in any currency is mind-blowing,” says Nikolay Storonsky, founder and CEO of Revolut.

“The same process to apply for a loan or credit card with my bank would take a week and cost me double.”

Better borrowing options

While the challenger bank is correct in saying 9.9% is cheaper than certain types of borrowing at a bank, there are obviously far cheaper options available.

If you want to make a big purchase you could simply opt for a 0% new purchase credit card instead.

The longest offer on the market at present is the Halifax 30 Month Purchase Credit Card.

Even if you have a poor credit history, you can at least get four months’ interest-free on new purchases with the Aqua 0% on Purchases Card.

Anyone looking to borrow larger amounts could consider a personal loan instead.

M&S Bank will lend £5,000 over 12 months at 3.6% APR, with the same rate available on its five-year loan.

[Read more: Best 0% credit cards that offer interest-free periods on spending]

If you really need to borrow now

Of course, a key selling point of Revolut is that it’s instant borrowing.

Taking out another line of credit can take days to process.

But even if you need money now and don’t have an emergency savings fund to cover the costs, you’d still be better off putting that debt on an existing, interest-earning credit card and switching the debt to a fee-free 0% balance transfer deal as soon as possible.

You can currently borrow for an impressive 28 months interest-free with the Sainsbury’s Bank No Balance Transfer Fee Credit Card.

In summary, take the time to shop around and you’ll find far cheaper ways of borrowing.