Here are some of the best ways to borrow money

There’s no doubt that at some point in your life, you will need to borrow money. Whether it’s for your grocery shopping, buy a new car or put down a deposit for a new home, people will turn to a loan if they do not have enough in their savings.

When it comes to borrowing money, it can be confusing and even a little intimidating when looking for the best option, and you can end up choosing a loan that you can’t afford.

But don’t panic! We have put this quick and handy guide together to help you understand what type of borrowing opportunities are available to you. Here are your options:

OVERDRAFT

An overdraft should only be used for short-term borrowing and emergencies. When you go into your overdraft, you’re immediately getting yourself into debt. An overdraft will enable you to borrow money quickly through your current account, but there is normally a charge involved.

There are two types of overdraft: authorised and unauthorised.

An authorised overdraft is an agreement you make with your bank. This means that you set an overdraft limit with your bank, which you cannot go over. You can use this overdraft through any payment method, and in turn you will pay interest or a fee for using the overdraft. Some banks do provide interest-free overdrafts, but this happens less frequently.
An unauthorised overdraft is where you have withdrawn more money than you originally had in your account, without making an agreement with your bank. We highly recommend that you use this method of borrowing as a last resort. You are more likely to be charged with expensive fees.

Overdrafts are not suitable for long-term borrowing, as they can charge higher interest rates than what you would get with a loan or credit card. They are only beneficial to those who are looking for a small amount of money for a short period of time.

Having an authorised overdraft that is interest-free can be beneficial depending on your situation. You can use this a protection net from fees and charges if you accidently take out more money than your authorised overdraft limit.

Benefits:

Easy to organise.
Only pay interest on what you borrow.

Costs:

Higher interest rates.
Cannot be used for large borrowing.
Bank can limit your repayment time whenever they please.

CREDIT CARDS

You can use a credit card as a borrowing method, but you must be responsible with it. Credit cards are flexible, and can allow you to spend money up to a certain point. Each month you will have to make a repayment to your card lender.

Paying off the balance in full every month would be ideal, as you won’t have to pay interest on what you borrowed. However, if you make only the minimum payments towards your card, you will need to pay interest.

Tip: we recommend that you set up a Direct Debit for the monthly repayments. This will automatically deduct the amount you owe towards your card, meaning that you’ll never miss a payment.

When applying for a credit card, the lender will provide you with a credit assessment. This normally involves checking your credit report to see if you’re dependable to make the repayments. Having a good credit rating will boost your chances for approval. You may even get the chance to access cards with lower interest rates.

Benefits:

They are safer than cash because if your card is stolen, all you have to do is contact your card provider and get them to cancel the card. You may even get money back from your bank if your card is used fraudulently.
You can gain rewards from credit cards.
If you don’t have cash on hand, your credit card allows you to make a purchase and pay the money back later.

Costs:

If you don’t pay the balance in full every month, you will be charged interest. Plus, the interest rate tends to be higher on a credit card than a loan.
Late payments cause the interest to build up, which will leave you tumbling into debt. If you’re continuing to use your card whilst paying back what you owe, we would advise that you stop, it will only add more debt to your already full plate.
Although credit cards charge interest, they also have additional fees if you miss or make a late payment. Your credit rating will also be affected.
You may also be charged a fee if you take out cash using your credit card, and some card providers charge a monthly/annual fee also.

UNSECURED/PERSONAL LOANS

An unsecured – or as most know as a personal loan – is a long-term borrowing method that allows you to pay back a fixed amount of money every month. The term ‘unsecured’ means that the borrower doesn’t have to offer up anything as collateral.

Benefits:

Your loan repayments are normally fixed, meaning that they won’t change.
You can borrow more than what you would with a credit card.
You can choose the length of your repayment period. Keep in mind, you may be charged a higher interest rate if you pay back the loan over a longer period.

Costs:

Tend to have higher interest rates as they pose more risk to the lender.
Banks tend not to offer loans lower than £1,000.

SECURED/HOMEOWNER LOANS

This option is only available to homeowners. This type of loan will be ‘secured’ against an asset you own, typically your home. This means that the borrowers home will be used as security, meaning that until the loan is repaid, the lender holds a legal charge over your home.

Secured loans are used for long-term borrowing, and are useful for those who are looking to borrow large sums of money – with some lenders, the minimum loan amount will be £3,000. The amount you borrow will normally depend on the value of your home.

Benefits:

You can access lower interest rates as the loan is secured against your home.
Often lower monthly repayments.
Can be repaid over a long period of time – typically 3 to 30 years.

Costs:

If you fail to keep up with the repayments, you could potentially lose ownership of your home. However, the process for the lender to take full ownership of your home is complicated and happens less frequently.
Loans that have variable interest rates could result in higher monthly repayments – always check to see if the loan is fixed or variable.