Types of borrowing
Understanding the options
Most people need to borrow at some point, but its important that you do it
wisely, and sparingly for the sake of your long-term finances. Here we'll explain
a bit about the various options available to you. You'll find more detailed
information by following the next step links at the bottom of the page.
Secured or unsecured what's the difference?
Secured borrowing includes things like mortgages and some
loans (you should be told if a loan is secured). It tends to be a cheaper
option in the long term, but is not without risks. The amount you borrow is
secured against your home, meaning that if you don't keep up the payments, you
risk losing it.
Unsecured borrowing covers things like personal loans, overdrafts
and credit cards. They are more expensive debts in the long run, with higher rates
of interest, but the debt is not secured against your home.
Mortgages are the biggest type of secured loan. The amount
you're able to borrow will depend on the value of the property and how much you
can afford to repay each month based on your income. Its secured in that the
bank or building society is agreeing to fund the purchase on the condition that
if you can't keep up the payments, they are able to take ownership of the property.
Bank overdrafts are unsecured and can be a useful short-term
solution if you just need a buffer for occasional use, or for a short period of
time, like a few months. They should be used for small emergencies, rather than
being seen as an extension to your bank balance.
Credit cards are unsecured. They can be a handy way to pay for
items like TVs, household purchases like furniture, or to book a holiday if you
have the money to pay it off quickly. They can be an expensive way to buy things
if you keep a balance and only pay off the minimum, and especially if you use them
to withdraw cash. But there are some benefits in that they generally come with
insurance that will protect you if a company you buy something from goes into
liquidation, or an item you buy stops working and the retailer won't honour the
warranty.
Personal loans can be secured or unsecured and are generally
for anything from £1,000 to £15,000, or even more. Be sure to check which if you're
considering applying for one. Although if you don't own your home, you will only
be offered an unsecured loan. The longer period you spread repayments over, the
lower the monthly amount you pay will be, but be sure to check the interest rate
and understand exactly how much you'll be repaying over the course of the loan.
Store cards and other shop-related borrowing, including catalogue
accounts, are unsecured. And while they seem like an easy way to buy things you want
now, and pay for them later, you will find that they usually have very high interest
rates so will cost you a lot more in the long run.
Hire purchase and finance agreementsare most commonly offered
when you're buying a car, appliances or other home items such as furniture. It works
in a similar way to a loan, where you agree to pay back a set amount each month
until the cost of the goods, plus interest, is paid off. There will usually be a
much higher rate of interest than on a loan, however, and it may be 'front-loaded'
which means all you pay off initially is the interest, not what you owe on the goods.
Be sure to read the small print, as you may still be liable to pay off the debt even
if you give the goods back because you can no longer afford them, or no longer want
them.