Here Are The Different Ways To Borrow Money
If you're looking to borrow money, it's useful to consider the different options you have. Whether you're borrowing a small amount or purchasing a house, borrowing for a few days or for several years, there are more ways to borrow than you might first think of.
The most common ways to borrow money are loans, credit cards, overdrafts and mortgages. Some borrowing options are secured against assets while others are unsecured. Terms range from a few days to many years and the cost of credit varies considerably.
Read on for our full rundown of the different ways in which you can borrow money with the pros and cons of each and some borrowing options you might not have thought of.
Mainstream ways of borrowing money
Most people borrow using a credit card, loan, a current account overdraft or a mortgage. Each of these products is available by almost every major bank and building society and there are more specialist lenders focusing on loans and credit cards only.
Unsecured loans are the most common and best known way that people borrow money. These fixed term loans have a rigid structure which will typically lend you a large amount of money over an agreed period (typically 3 to 5 years, but can range from a few months to 10 years or more).
During this period, you usually repay the loan in equal instalments on a monthly basis.
The exact specifics of how the loan works differ from lender to lender - some calculate your total interest and add it to the loan amount upfront. Others calculate the proportional assignment of your payments towards interest and principal balance every month.
Unsecured loans are popular ways of financing large purchases such as home improvements or used cars as they ensure you complete the repayments in a reasonable amount of time.
Credit cards are the other popular way of borrowing money, offering the alternative way of using credit to loans.
Where loans have a fixed repayment schedule, credit cards offer you full flexibility allowing you to repay as much or little as you like (as long as you make at least the minimum payment every month).
While loans are usually taken for one large purchase or need, credit cards are there for whatever life throws at you over a period of time.
Loans land a large amount of money in your bank account while credit cards never let you see any of the cash - you just get to use their plastic to borrow it.
Credit cards can be a fantastic tool for building and improving your credit and using money to your advantage. The number of different schemes, promotional deals and offers means there is always a way of gaming credit cards for your benefit, but you have to be extremely disciplined and have a firm plan as they are also easy to spend on and can build up debt quickly.
Secured loans are less common in the UK than their unsecured cousins. Quite simply, these loans have a guarantee in the form of an asset whereas unsecured loans have no physical guarantee attached to them.
The majority of secured loans are secured against property - these are called homeowner loans or 2nd charge mortgages. The key is that they are secured against the equity in the house you hold that is not covered by the mortgage.
So if your house is worth £200,00 and your remaining mortgage balance is £120,000, you could get a secured loan against some part of the £80,000 difference.
Some secured loans exist that can use assets such as your car instead, but these are relatively rare.
Secured loans look and feel a lot like unsecured ones, but will usually have lower APRs for the same level of customer risk.
Although that can sound attractive, there's a few important downsides you should bear in mind.
First, a secured loan is likely to make any remortgage that much more complicated and especially so if you're looking to pull some equity out of your house.
Even if you don't intend to do this, if your financial circumstances change, it may prove difficult to use your house to raise funds.
Another thing to remember is that although lenders of unsecured loans can pursue you for the loans if you default on your payments, the process will be lengthy and it is hot common for homeowners to lose their homes for smaller unsecured loans.
When you get a secured loan, you sign up to a much bigger risk of having to sell your home if you're not able to meet your repayments.
Overdrafts have become so common on current accounts, many customers don't even consider them as a form of borrowing.
The concept of "dipping into your overdraft" has become the way millions manage their finances towards the end of the month, a few days before the arrival of the next paycheck.
Overdrafts come in two guises - arranged and unarranged. Arranged overdrafts used to offer good value borrowing for those who needed it - you could use it for the last week of the month and pay a few pence for the privilege.
Recent regulatory changes have put a big dampener of the practice as many banks have changed their pricing structure and most arranged overdrafts now charge a high level of interest. Some have gone completely overboard with Barclays charging 35% interest and HSBC going for a hefty 39.9% for all of their customers.
Most bank accounts will allow you to go slightly overdrawn without charging anything, but we're only talking about going over by £10 to £25 which doesn't give you much scope for borrowing.
Given these regulatory changes, going into your overdraft has become much worse and you're better off getting a credit card that you can use if you have to at the end of the month, repaying it in full the next month without having to pay any interest at all.
Mortgages are a special kind of secured loan that is used for purchasing property. In most cases, mortgages will fund your home, but they can also be used for buying any other kind of house, building or premises for work or other reasons.
Because your home is likely to be the largest purchase you will ever make (or at least until you buy your next home), mortgages typically come with very long repayment terms. When you're first buying, you're likely to take out a 20 or 25 year mortgage as a minimum with some first time buyers pushing into 30 and even 35 year terms.
Mortgages also usually have the lowest interest costs out of all regular borrowing products. They are usually highly dependent on the current Bank of England base rate and will typically be 1.5% to 2% or thereabouts higher than that rate.
In most cases you can get a better rate if you remortgage over time and get an introductory fixed rate for a period of between 2 and 7 years. These fixed terms are great at getting the best value mortgages but they also tie you in - if you choose to move during this time, you'll have to pay a hefty penalty fee which is often about 1% per year you have left on your fixed term - check your specific mortgage Terms and Conditions or auxiliary paperwork for your exact agreement details.
Less common ways of borrowing
You might not have heard or considered some other ways in which you can borrow, but there are other products that are available and can provide an alternative for those who have different needs or don't pass the criteria for the mainstream lending products.
Guarantor loans have sprung into prominence with Amigo Loans creating a new product class almost single-handed.
The principle of guarantor loans is simple - you borrow an unsecured loan just like a regular unsecured loan, but you have to have somebody who will vouch for you making the repayments and take on the burden if you don't pay back.
These loans are relatively expensive - almost all charge just under 50% APR, but they are considerably better value than payday loans and other high cost short term lending.
As a result, those who don't qualify for mainstream loans at low rates can use guarantor loans if they need to borrow a large sum.
The key benefit compared to borrowing from the bank of mum and dad is that your family don't have to provide the actual cash to you. They will only need to pay if you fail to do so.
You also get the added benefit of being able to build your credit while you're repaying the loan which can make it a good option for people who are new to credit or have previously had issues with credit.
Mail order and Buy Now, Pay Later
A lot of people will sign up to various mail order and pay later schemes and not truly understand that they are entering into a regulated borrowing agreement.
Although these are somewhat less common than they used to be with every shop wanting to sign you up to a credit card or to spread the cost, a new swathe of online lenders led by Klarna has appeared offering you to spend more than you can afford and then pay back in instalments.
A big positive change in these products has been a shift in who pays the lenders for the borrowing.
It used to be the customers. You want to walk away with the new washing machine, but don't have the money? No problem - fill in this form and we'll debit your current account every month for the next 3 years instead at 29.9% APR.
As fewer customers wanted to use these products, the lenders have increasingly begun charging the retail stores instead.
As a store, you don't want to risk customers choosing not to buy something because of not being able to pay for it and in a battle to avoid customers abandoning their virtual baskets, the retailers strike a deal where they pay the lender interest or fees and the customer is able to borrow at 0%.
Hire Purchase and Personal Contract Purchase
Hire purchase and personal contract purchase are two terms that are popular in car buying and the purchase of other depreciating expensive items.
It's important to note that these are different to Personal Contract Hire which is the more popular buying option in that they actually provide customers with an loan instead of effectively renting out the car over a long period of time.
HP and PCP are relatively similar - you pay a small upfront fee and then make monthly payments towards your car until the end of the term. In the case of PCP, you then have to make a final payment in order to purchase the car.
The critical difference is how these payments are distributed. Hire purchase agreements are pretty close to a typical loan. Your payments are spread over the term and at the end you are the proud outright owner of the car.
With hire purchase, things are a little more complicated. Your monthly payments will be much less, just about enough to cover the car's anticipated depreciation plus interest.
At the end of the fixed term, you have the option of making a large payment to own the car or hand the keys back and walk away with nothing.
Although many start out with the right intent, the requirement for the large cash sum at the end means that many don't end up ever owning the car after all.
Things that sound like borrowing but aren't
When people talk about debt and the different ways in which they have borrowed money, concepts can often get mixed and people can confuse genuine borrowing products with other things that are in fact not a lending agreement.
Some of these definitely sound like borrowing - student loans even have the word "loan" in their name! But basic concepts of borrowing products such as the requirement to pay them back according to an agreed schedule, the way you qualify for these products, impact on your credit profile and other factors can definitely make you think a little differently about these products.
Almost every student in the UK leaves university with a student loan which the government provides to help fund the cost of the course and students' living expenses.
The general perception, fueled largely by the name, is that these are loans that students borrow from the government and then have to pay back in the future, but if you look closely, they're not really loans at all.
The truth is that student loans are a form of progressive tax. If you choose to go to university and you are a British citizen, you are eligible for the loan. The end.
There are no credit criteria, minimum eligibility requirements (other than going to university) and no complex scorecards and credit policies that determine who does and does not get credit.
Not only that, but you only have to repay money when your earnings go above £25,725 per year. If you never go above that, you will not have to pay anything. For anything above that, you're paying a percentage of your income.
When you look at it like this, it certainly looks a lot more like a form of tax which gets levied on those who choose to go to university. These loans are also not reported to credit reference agencies and you cannot go delinquent on them (miss payments).
Personal Contract Hire (PCH)
Car dealers will often talk about Personal Contract Hire in the same terms as Personal Contract Purchase or Hire Purchase, but it's a very different type of product.
With Personal Contract Hire, customers never have any intent to buy the car. You're essentially setting up for a long-term lease where you will be paying above the odds for the privilege of being able to use the car.
As with Personal Contract Purchase, limits are placed on how much you can drive per year and how, where and when the car should be serviced.
At the end of the term, the car is returned and you have nothing to show for years of chunky direct debit payments. Although it may feel like a loan, it's not an actual form of borrowing.
There's a lot of confusion around what credit brokers are and what services they offer. A lot of people think that credit brokers have unique lending products that are not available through any other channel which makes them a distinct way of borrowing money.
Brokers, however, are not lenders. They will remind you of that in large font on their website as they have to due to regulation.
This means that all they are doing is advertising and marketing the services of banks and financial companies and selling loans, credit cards, mortgages and just about any other credit product on their behalf.
Sure - the application process will in many cases be done entirely through the broker and you might feel like your primary relationship is with them, but the ultimate borrowing is done between you and the lender and the credit broker is just acting as the middle man.
Brokers can be very useful in cases where customers are anxious, unsure or need somebody to guide them through the process acting as the go-between for the loan application.
Which ways of borrowing money are the cheapest?
Generally, the cheapest way of borrowing is to use 0% credit cards. This is also the least passive way as you have to be very organised to make sure you move your balances between cards at the exact right time and you have to have good credit for the duration of your borrowing in order to be able to do it.
If you use one of these methods, you may be able to borrow at the equivalent of annual rates as low as 1.5% APR, 1% or even lower through not paying interest and only paying small transaction fees every 2 to 3 years.
Loans can also be cheap with the lowest rates available on the market at just below or around the 3% mark. Remember that most lenders will only offer the super low rates for those borrowing over £7,500 or so with much higher rates for lower amounts.
This is an antiquated way of pricing that for some reason still hasn't been replaced and means you may actually find you can borrow more than you need and pay much less interest in total on a £10,000 loan than you would if you only asked for £5,000!
Mortgages are also cheap, especially if you have at least 40% equity in your property. Rates can be below 1.5%, but as this is not an everyday way of borrowing, I didn't mention it further up.
How much can you borrow via different ways of borrowing?
How much you can borrow really depends on the method you're using.
At the top end, mortgages can open up hundreds of thousands of pounds depending on your affordability, but the process is long and you can only use mortgages for buying a house.
Credit cards come in two guises - regular premium credit cards will usually give credit limits between £1,500 and £25,000. There are a few outliers, but expect to get lower limits on transactional products (like reward cards) and higher limits on balance transfer credit cards.
Higher priced credit builder credit cards will offer lower limits upfront. Usually the majority will get a credit limit of about £250 with some getting £500 or £1,600 and a tiny fraction getting a limit above £1,000.
These can increase fast though if you use your card responsibly with limits growing as high as £3,000 or even £4,000 within 2 to 3 years.
Loans normally also lend up to £25,000, but the pricing sweet spot is usually in the £7,500 to £20,000 range although it's different for every lender so make sure you check.
Overdrafts are not designed for long-term borrowing and are there for the occasional dip at the end of the month. As a result, the majority of overdrafts are around £500 or £1,000 with only a very small number offering a facility of more than £2,000.
Alternative ways of borrowing money you might not have thought of
Although there's a lot of different credit products available on the market, you may not have considered some other ways in which you can borrow that can be a good alternative to the above.
These can be much cheaper than the rates that you will have to pay on the high street, but beware that involving friends and family in money can be challenging down the road and not everyone is comfortable with mixing their workplace and the need to borrow.
Borrowing from your parents or family
I can already see you moving uncomfortably in your seat at the mention of asking your friends or family for a loan. In some countries, this is a perfectly normal thing to do and the way many people borrow. In parts of Eastern Europe, this is how many people bought their first house until very recently.
In the UK we're not great at talking about money with those close to us, so borrowing off our relatives is often seen as the last resort.
But remember that your parents or other family members may be in a very different financial position to you and have spare money that can help you out in a time of need.
With savings accounts returning nothing point zero percent and investments going through a rocky patch, your mum and dad or grandma may well be very happy to be able to help you if you were to ask.
Couple that with the fact that you're likely to get a better interest rate (some parents will not charge) and the ability to discuss your payments without having to wait on the phone for an hour between the hours of 9 and 6 and you actually have a very sound option for borrowing.
Workplace loan schemes
Although this is not very common, some companies offer their employees loans. You might not have considered using them, but often these loans can be had at attractive interest rates and relatively simple to get.
Some of these loans will be against specific needs - buying a bike to ride to work is popular as are season tickets for transport and sports teams.
You might not usually borrow to buy your quarterly bus pass, but if you do borrow for other needs, why not make use of the scheme and change your finances to use the cash you normally spend on travel towards other more pressing expenditure.
Similar to the above point with parents, it might seem daunting to mix your work and personal finances, but almost all of these schemes are operated by third parties and your company will not know anything about your finances or reasons for borrowing other than the amount that will be taken out of your paycheck every month.
If you're a Director of a limited company, even if it's just a small entity to cover your contracting or a small shop, you might be able to make use of Director loans to borrow money when you need it.
The benefits here are that you're able to borrow the money fast (as fast as you're able to pay it yourself) and you should be able to structure your repayments based on your estimate of personal and business cashflow.
You get to play the lender and the borrower at the same time!
The downside is that there are a lot of rules around taking out Director loans - make sure you do your homework and consult your accountant.
You have to charge reasonable interest rates to yourself in many circumstances and if your loan goes on for a long period of time, you may have personal and company tax implications.
Using a credit card to borrow a month's worth of cash for free
I know I've already covered credit cards, but this one is that little bit different so i wanted to go through a different way of borrowing that you may not have thought about.
If the amount you want to borrow is roughly equivalent to or less than the amount you spend in a normal month on everyday things and bills, you could borrow that much for free by using a credit card.
Unlike the usual way of borrowing on a credit card by carrying a balance and paying interest, I'm talking about something a little different. Here's how it works:
Get a credit card that has a credit limit that will allow you to spend a month's worth of your regular spending. Then go spend that amount over the course of the month and when you need the funds you were going to borrow, simply use the money sitting in your current account that you would have spent instead.
Next, get your credit card statement and continue spending on your credit card. Repay the statement in full (preferably by Direct Debit to make sure) on the payment due date. Rinse and repeat.
What you've now done is effectively deferred one month's of spending to the following month and you can continue doing that for as long as you repay your card in full.
The moment you have money coming in to repay the amount you have "borrowed", make overpayments against the full balance of the credit card, not just the previous statement until you don't have a balance at all on the statement date.
This is an unusual way to think about it, but even if you're paying a credit card off in full every month, you're still essentially able to borrow a month's worth of money through doing it.
Other ways of borrowing money that you should NOT do
You have probably heard of lending products such as payday loans and loans that will charge APRs with so many zeros, you have no idea what that actually means in terms of paying the money back.
Although some of these are legal (although close to the line), I would strongly recommend you steer away from all of the below ways in which you can borrow because they are ridiculously expensive, can cause a great amount of stress and anxiety and in some cases are illegal and unregulated.
Here's what you should avoid when you're making a decision to borrow money.
Payday loans and High Cost Short-term credit
Although the regulators have been working hard on tackling some of the problematic high cost short term credit products, some of these remain in the market.
Payday loans and the sky-high APR high cost loans will typically lend money over a period of days or weeks and collect payments on a weekly basis or on the day you are paid, usually with high associated fees and interest charges.
Some customers fall into these types of loans out of desperation and others find themselves flung into paying exorbitant rates through pressure selling tactics or simple misselling.
You should avoid these types of loans not just because of the incredible cost, but also because of the lending practices that firms that offer them often engage in. You may find scare tactics being used to collect payments and the encouragement and hard-sell of further top-up loans that can easily make you spiral out of control.
As the industry has been changing in the last few years, the majority of regulated companies have already moved away from offering payday loans and the others are changing their business practices fast. This means that many of the remaining loans are sold by unregulated loan sharks which will make it harder for you to use formal regulatory or ombudsman channels if you have to in the future.
Pawnbrokers are another business that is rapidly going out of fashion but a few still exist on high streets all over the UK.
With The Moneyshop closing its doors, the likelihood is that the regulator will continue forcing this industry to change its ways, but in the meantime, it is best to avoid using pawnbrokers at all costs.
The valuables you deposit with them are often family heirlooms and items of sentimental value. Although at times, things can get incredibly hard, it is often a better idea to identify less valuable and important items you're able to sell or seek additional income from temporary or part-time jobs instead.
The questionable nature of these types of lenders can often mean your possessions will be grossly undervalued and there are frequent reports of items going missing or being sold despite you not falling short of the agreed payment dates.
Loan sharks and doorstep lenders
Loan sharks and various doorstep lenders still operate in the UK, especially in some inner city areas.
These lenders are unscrupulous, have no formal regulatory oversight and will not have any systematic way of either assessing your need for debt, your ability to repay or manage your loan.
You may find extremely unpleasant collections practices employed where these loan sharks will physically come to your front door at a time of their choosing. They can be aggressive and cause high levels of anxiety - explore every option possible instead of using loan sharks.
These lenders can disappear as quickly and easily as they appear and if you needed help from the police or other authority bodies, you may find it incredibly difficult to track down the lender and even if you do, prove the nature and amount of the loan.
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