Types of credit
Borrowing money has become tougher, but there are still several different ways to do it.
An overdraft is one of the most common types of credit. With your overdraft, a 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. Learn more about overdrafts in this blog.
Pros: Quick way to borrow money
Cons: Fines can be hefty if you go over your limit
Credit card/store card
This is one of the relatively expensive types of credit. 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 here.
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
Unsecured loans are 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. Check out our blog about unsecured loans here.
Pros: Good for borrowing large sums of money
Cons: Can get scary pretty quickly if you miss repayments
This is 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. A hire purchase is 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 a secured 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 here.
Pros: Low interest rates
Cons: You can lose your house!
Also coined ‘short term cash loans’, payday 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 for these types of credit – sometimes over 1,500%. 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.
By Holly Turner
Updated on 08-Jun-2021
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