Be realistic for trouble-free borrowing
Most people need to borrow at some point, but how do you do it wisely?
Your options
Secured borrowing, including mortgages, is generally cheaper over the longer term but is normally secured with your home. However, you'll need to extend your borrowing term to achieve lower monthly repayments and overall you'll pay back a greater amount. Also, if you default, you can lose the roof over your head. It's easier than ever to withdraw equity from your property if it's increased in value. But, again, if you're using a secured loan to pay off several unsecured loans, your home is at risk if you do not keep up repayments.
Unsecured personal loans, overdrafts and credit cards are available if you don't own your home or don't want to secure a loan on your property:
- Personal loans: Usually repayable in monthly instalments by Direct Debit/standing order over a fixed period. They are popular for loans of between £1,000 and £15,000 but you could borrow less or more depending on the lender.
- Overdrafts: Easy and flexible. An authorised overdraft can be good value but straying beyond the agreed limit will mean fees and higher interest charges.
- Credit cards: Another flexible way of borrowing. Apart from a minimum monthly balance payment, borrowing on cards allows you to pay off the debt in your own time. You can make lump sum repayments too if you have cash spare. Generally higher interest rates than loans could mean poor value for longer-term borrowing.
What are you borrowing for?
Whether it's for a new pair of shoes, school fees or an extension to your home, be clear about why you need the money then choose the most appropriate way to borrow.
Credit cards are handy for shopping but are an expensive way to fund bigger or long-term financial needs, such as a home extension, when compared to using some of the equity in your property.
What can you afford?
Deduct your total monthly outgoings from your income to find out how much disposable income you have. Be realistic. If you have £280 left over at the end of the month, don't commit the whole lot to loan repayments or you could end up paying a restaurant bill from your jar of pennies. Work this out with our budget planner.
Interest rates and charges
At the simplest level the APR (Annual Percentage Rate) relates to the total charge for credit - the amount of interest you pay and most other charges such as arrangement fees and annual fees - and when and how often these must be paid.
But the APR is only a guide - it may not include additional charges you may incur such as early repayment charges for loans and late payment charges for cards. Also you may not be eligible for the rate featured in the advert.
To get a true comparison on loans, focus on the actual amount you will repay and over how long. For tips on comparing credit offers look at the Financial Services Authority (FSA) consumer help guide.
How long to repay?
Aim to repay the loan as quickly as possible (although watch out for early repayment charges). Lenders often charge lower interest rates if you borrow larger amounts or pay back over a longer period. But the longer the term, the more interest you will have to repay and the bigger the burden if you should lose your job.
If you get turned down
Credit reference agency applicant searches leave a 'footprint' on your credit rating that can affect future borrowing requests so don't press on if you're having no luck. Instead, think about why you're being turned down and perhaps borrow less.
If you change your mind
Use any 'cooling off' period included in your credit or loan agreement. Before you put pen to paper, ensure you're confident with the deal and that you can pay back your debt.
Debt - be careful
Don't let desperation be your motivation for borrowing more - it will only lead to bigger problems. Rolling several expensive debts into one cheaper loan to reduce your outgoings can be a good idea but borrowing more just to pay debts is not.
If you get into trouble, get help. See our debt management guide.
Useful links
Budget planner
Personal loans from Barclays
Homeowner loan
Important information
