9 different ways of borrowing money
The subject of borrowing money and the different types of lending can be pretty overwhelming if you’re not quite sure where to start.
There are so many borrowing methods to consider and it can be tricky to know which one is best for you. Thankfully, we’ve put this guide together which shows you the different types of borrowing available to you in the UK, as well as how to check your borrowing eligibility and how credit works.
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What is borrowing in finance?
Borrowing involves a type of loan that you can receive if you’re in need of a bit of extra cash. It’s important to remember, however, that this isn’t just “free” money; you will have to pay the money back that you borrow, often with added interest and other fees on top.
Therefore, before you commit to borrowing money, you need to be aware of the pros and cons of doing so, as well as how it could affect your credit score.
Ways of borrowing money
As we mentioned above, there are countless ways of borrowing money to wrap your head around before you decide which one is best for you. There are 9 different ways listed below, but bear in mind that you may come across other ways while comparing deals online.
Overdrafts are one of the most common methods of borrowing as they’re relatively easy to come by; many banks will allow you to have an overdraft as part of your bank account agreement.
An overdraft is a type of short-term loan that can be used in emergencies where you don’t have enough money in your bank account to pay for something. Some banks offer a 0% overdraft, which means you won’t pay any interest, providing that you pay the money back within a given period of time. However, some providers may charge you to use your overdraft which could mean you have to pay back more than you “borrowed”.
Read our complete guide to overdrafts for further information.
Credit cards are another very common method for people to use when they’re looking to borrow money.
With a credit card, you can purchase things using the card and then pay it off at the end of the month. Providing that you make your repayments on time and in full, you won’t usually have to pay any interest so credit cards can be a good way of borrowing money and they can also help to build your credit score when used correctly.
These types of loans are usually used for larger purchases such as buying a new car. It involves borrowing a larger sum of money and then paying it back in monthly installments over a given period of time.
With an unsecured personal loan, you must always remember to check for any early repayment charges. While you might think it’s good to pay back the loan early if you’re able to, you can actually sometimes be penalised for doing so.
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A mortgage is a very popular type of loan, especially when it comes to buying a property. This type of loan is secured against your home, which means you have to ensure that you always make your monthly payments otherwise you could run the risk of losing your home.
Mortgage loans often last for many years and only once you’ve fully paid your mortgage off, will you then actually own your home without having to make any repayments on the purchase.
If you’re strapped for cash one month and you need some money to tide you over until payday, then a payday loan can offer you exactly that.
They’re a type of short term loan that often come with incredibly high interest rates, so they should only really be used in times of absolute emergency when you really need cash.
Student loans are typically long term loans that students use to pay for things like their tuition fees, accommodation, books, food and other academic-related purchases while they’re at university or college.
In the UK, you only have to start repaying your student loans once you earn a certain amount of money each year; if you don’t meet that threshold, then you don’t have to pay off your student loan.
Doorstep loans are somewhat similar to payday loans and they often come with incredibly high-interest rates. They usually involve cash being delivered straight to your door, hence the name, but they can also be paid straight into your bank account.
When it comes to repaying a doorstep loan, the provider might come directly to your house to collect the money, or they may just take the payment over the phone or online.
You might like: What is a good credit score?
Building society loans work in a similar way to banks in that they enable you to borrow money in the form of credit cards and mortgages, amongst other means.
They’re often thought to be a little harder to obtain than other types of traditional loans, but you’ll likely be able to find numerous local building societies in your vicinity who you’ll be able to arrange a loan with.
A credit union is a type of not-for-profit financial institution that is considered to be a community lender, so they’ll likely lend money to almost anyone who can prove their eligibility.
When you borrow money from a credit union, you’ll often benefit from lower interest rates, better borrowing terms and reduced fees.
Should I borrow money?
When determining whether you should borrow money, you need to consider factors such as how much you can afford to repay, the lender’s interest rates and the type of deal you’ll get.
Borrowing money is a very personal decision and once you’ve asked yourself the question of “am I eligible to borrow money?” (you can check the likeliness of this by checking your credit score), you will then need to decide which option is best for you.
Tips for borrowing sensibly
When it comes to borrowing, it’s imperative to borrow sensibly and remember to only borrow money if:
You know you can pay it back
You’ve checked your credit file and know how it will affect your credit rating
There’s an interest-free period you can take advantage of
You’ve researched the best borrowing method for you
Check your score now or read our guides below for further guidance: