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Borrow sensibly

Boots in Garden

Loans, credit cards, store cards, overdrafts – with so many borrowing options available, it can be difficult to know which one’s right for you.

It’s important to do your research and find out, though, because the wrong choice could cost you hundreds – even thousands – of pounds unnecessarily.

Before you borrow

The first consideration should be to seriously ask yourself why you’re looking to borrow and if you really need to.

For many people, borrowing is a key part of their finances – mortgage, credit cards, car loan, etc. But you shouldn’t borrow to fund a lifestyle you can’t really afford, just because it’s on offer (eg store cards) or without thinking about whether you’ll actually be able to afford the additional repayments come what may.

And while moving your existing borrowing to a better interest rate can be a good idea, borrowing more money to get out of debt never is. This is how people get caught in a spiralling debt trap, where more and more of their income goes to repayments until they can’t afford their priority bills and household expenses.

If you don’t really need to spend the money straight away, you should consider saving towards the purchase over time to avoid taking on additional debt.

Can you afford it?

If you haven’t already, you can use our budget planner to weigh your outgoings up against your income, and see how much you’re left with each month and how much you can comfortably afford towards additional repayments.

Firstly, this will help to ensure that you can meet both your existing and new financial commitments. Missing repayments can have serious consequences on your ability to get credit in the future, even many years down the line.

Secondly, how much you can afford to repay – the amount of time you’ll need to clear the new debt – will be a key deciding factor in which borrowing option is most suitable for you to ensure you don’t pay more than you need to.

Choosing the right option

This depends on the reason for the borrowing and the repayment timescales you have in mind.

Short-term borrowing

If you’re just looking to borrow for a short time, you could consider either a credit card or overdraft.

Many credit cards have interest-free deals for a limited time, making them an ideal option if you’re looking to pay back the amount within a few months or so. The rates do increase significantly after this time, however, and if you have a poor credit rating, you may not qualify for the special offer rates.

Some current accounts provide an interest-free overdraft up to an agreed limit, making this another option for short-term borrowing. You’ll need to ensure that this is authorised by your bank, because if it’s not, you could face high interest rates as well as fees.

Longer-term borrowing

For larger amounts of borrowing, over a longer period of time (3-5 years), personal loans are often very competitive and can be cheaper than a credit card. For many people, the fixed repayments are also a bonus, as they help them to budget accordingly.

You should still look to pay the loan off as quickly as you can, because although the lower monthly repayments may be tempting right now, the overall amount you pay back will be higher if you extend the term longer than you really need to.

If you have poor credit, you may be offered a loan but at a considerably higher interest rate. This will still be preferable to payday loans or doorstep lenders, whose interest rates can reach into the thousands, but you should shop around and use comparison websites to ensure that you get the most affordable loan for your circumstances.

You could also consider joining your local credit union. As not-for-profit organisations, they often provide low-interest loans to their members, and they’ll only lend what they feel you can afford to borrow.

With any personal loan, you should avoid securing it against your home until you take independent financial advice. The rates may be lower, and it may seem a cheaper option, but if you don’t meet your repayments, you could lose your home.

If you get turned down

If you’re turned down for borrowing, the chances are that your credit rating isn’t high enough to meet the lender’s criteria. You shouldn’t keep applying through different lenders, as this will appear on your credit report and could damage your credit rating even more.

You can check your credit report with credit-reference agencies online and take steps to improve your credit rating and your chances of being eligible for borrowing in the future.

Important information

Disclaimer The information contained on this page is for general guidance on matters of interest only and should not be regarded as a personal recommendation or legal or other professional advice. If you do need advice on any specific problem, or would like further information on any information contained in this document or on our website, please contact us.