Types of credit
Borrowing money has become tougher, but there are still several different ways to do it.
Your bank allows you to temporarily take extra money out of your current account. You are usually expected to pay this money back quickly, and the interest charges can be very expensive. The cost is even higher if you do this without asking the bank first. You could be charged stiff penalties that may add up to hundreds of pounds over a few months. Read more about overdrafts.
Pros: Quick way to borrow money
Cons: Fines can be hefty if you go over your limit
Credit card/store card
This is another relatively expensive way to borrow money. You get a card to pay for goods and the card provider sends you a monthly bill; you can clear all or some of the balance, or make the minimum payment. Good for using on holiday, and many credit cards also provide short-term insurance for your purchases. Read more about credit cards.
Pros: Using credit cards sensibly is good for your credit rating
Cons: It’s easy to fall into the trap of only paying the minimum repayments and never clearing your debt
Useful if you need to raise a fairly large sum of money. You have to shop around for the best rates and be absolutely certain that you can afford the monthly repayments. If you don’t pay up, you can be taken to court, or they might send the debt collectors around. The newer flexible loans may sound like a great idea but watch out – you could end up paying more interest. Read more about unsecured loans.
Pros: Good for borrowing large sums of money
Cons: Can get scary pretty quickly if you miss repayments
A type of credit provided when you purchase a specific item. Hire purchase agreements (HP) mean that you’re partly paying off a loan, and partly renting the item. They can take a very long time to pay off, and are often extremely poor value for money. You can end up paying much more than the actual purchase price. Sometimes offered on furniture or cars.
Pros: You get a cool new car, like, NOW
Cons: You’ll end up paying much more than it’s worth in the long run
Your home is the ‘security’ for this type of loan. Although you may get a good rate of interest, if you can’t keep up the payments your home can be repossessed by whomever you owe the money to. A mortgage is a common example of a secured loan, where you can end up homeless if you default on the repayments. Read more about mortgages.
Pros: Low interest rates
Cons: You can lose your house!
Pay day loans
Also coined ‘short term cash loans’, pay day loan companies offer you wads of money on a short-term basis, often to tide you over until you’re paid or your student loan comes in. The catch? They charge a huge amount of interest – sometimes over 1,500% – for the convenience. Even if you pay the loan back straight away, you’ll pay back significantly more than you borrowed
Pros: It’s pretty darn easy to get one
Cons: The interest rates are HIGH
If you need further support on this, give us a call on 0808 808 4994. We’re unable to give specific money advice but can guide you to the best places for expert support.
Updated on 29-Sep-2015
Cheaper ways to get a degree
Going to uni too much money? There are other ways you know.
Can I afford this debt?
Getting into debt is easy. Getting out of it, not so much.
What is Universal Credit (UC), and how will it work?
Should I be saving money?
How to save, even when you're broke
Working below the minimum wage
Working below the minimum wage is illegal, but Ankur ...