If you find yourself needing to borrow some money, it can be hard to weigh up the options available to you. Here we give you a quick overview of some of the more common ways, how they work and what you might want to think about.
The key thing to remember is to only ever borrow if you’re comfortable you can afford the repayments. That includes any interest that may be charged for some types of borrowing. Missed repayments can affect your credit score and getting deeper into debt can lead to things like bankruptcy or an Individual Voluntary Arrangement (IVA).
If you always bear that in mind, some of these may be suitable options…
Overdraft
An overdraft is a way to borrow money when your current account balance has gone down to zero. It’s basically a small loan. There’s usually a charge if you use it (if you go ‘overdrawn’) and it can be an expensive way to borrow – so it’s only for short-term cash problems or emergencies. There are ‘authorised/arranged’ overdrafts, where you agree an overdraft limit with your bank in advance. Then there are ‘unauthorised/unarranged’ overdrafts, where you go overdrawn without the bank’s permission. In general, it’s sensible to avoid using your overdraft unless you have to.
Credit cards
A credit card can be a way to pay for things using a physical plastic card, or the digital version stored in your phone’s ‘wallet’. When you spend on a credit card, you’re effectively borrowing from the credit card provider. So, it’s money you need to pay back. The card provider will agree a ‘credit limit’ with you that you can spend up to and they can charge you interest on your credit card balance. If you repay your full balance each month by the payment due date, you won’t pay interest. But if you don’t, it can get very expensive as interest is charged. You could also be charged fees if you don’t make payments on time or go over your credit limit - and this can harm your credit score too.
Personal loans
Personal loans are commonly used for things like home improvements or bigger purchases, like a car. You borrow a set amount of money from a lender and pay it back over a fixed period, commonly one to five years. You’ll need to pay interest on the loan as well as paying back the loan amount itself. Personal loans are normally ‘unsecured’ – unlike a ‘secured’ loan for example a mortgage, where your home is at risk if you don’t keep up repayments.
Buy Now Pay Later (BNPL)
As the name suggests, Buy Now Pay Later schemes let you make a purchase but spread the cost over a number of weeks, months or even a year. Often, you’ll be offered this when you shop online or in store. It’s usually interest-free but if you don’t pay on time, you can get hit with late payment fees. As it’s a credit agreement, BNPL providers will do a ‘hard’ credit check that will show on your credit file and missed payments can harm your credit score. It’s worth remembering that at the time of writing this article in September 2024, BNPL schemes aren’t currently regulated.
Vehicle finance
This is where you borrow money specifically to buy a vehicle. The lender will pay the vehicle dealership for you, and you’ll then owe the money to the lender. You’ll pay them back in monthly instalments over a set period, for example 3 or 5 years. There are different types of vehicle finance agreements, such as Personal Contract Purchase (PCP) and Conditional Sale. With a PCP, at the end of the agreement you’ll need to pay a lump sum, known as a balloon payment, to buy the vehicle outright. With a ‘Conditional Sale’ agreement, you’ll legally own the car after the final payment as there is no lump sum to pay at the end.
Second charge mortgages
This can be used for things like home improvements, consolidating your debts into one loan, paying for a wedding, or funding school fees. A second charge mortgage is a ‘secured’ loan. It’s usually secured against your home, which means it may be at risk if you don’t keep up repayments on the second charge mortgage. It can be quicker to sort out than increasing an existing mortgage (it typically takes 15 days for a decision). The interest rate can be lower than a credit card or loan. And you may be able to borrow more than a personal loan.
Pawnbrokers
With a pawnbroker you borrow against something valuable you own, like jewellery. The pawnbroker will lend you money based on the value of the items and then they keep hold of them. If you repay the loan and interest within the agreed timescale, you’ll get your valuable items back. But if you don’t repay, the pawnbroker can keep them to cover what they’re owed.
If you do use a pawnbroker, check them out first. Pawnbrokers are regulated by the Financial Conduct Authority but there are still illegal places out there. For peace of mind, it’s worth a quick search of the Financial Services Register to make sure they’re on there.
Hopefully this gives you a useful introduction to some of the common ways you can borrow money. Remember, being able to afford to repay what you borrow is key.