Most of us borrow money to buy our homes, and many of us borrow money in the form of a loan to pay for cars and holidays, or the odd shopping treat. If your borrowing is under control, then it is a sensible way to manage your finances.
The secret to safe borrowing is making sure your debts and the interest you pay are kept under control.
So if you are going to borrow money, what is the best way to do it? We look at the advantages and disadvantages of the most popular methods borrowing.
Unsecured personal loans from a bank, building society or other provider can be a relatively quick and easy way to buy what you want or to consolidate your debts. Generally they allow you to borrow between £500 and £25,000. But they can tie you in for between six months and 25 years.
Because these loans are unsecured – there is no collateral such as your home to back them up if you default – therefore lenders can sometimes charge more to compensate for their risk.
Lenders advertise their Annualised Percentage Rates, but beware as depending on your credit history you may not get qualify for the lowest rate. If you are believe you to be a higher risk then they will charge you a higher rate.
Personal loans tend not to have set-up fees. The downside is that if you wish to pay back the loan back early ahead of the agreed time you could be stung with early redemption fees. It is always good to pay off debts as soon as possible, so personal loans may not be right for you if you think you may have the ability paying them off quickly.
To find the best personal loan for your circumstances see our best buy tables and apply online.
A homeowner loan is similar to a personal loan, but it is secured on your home. Interest rates on homeowner loans tend to be variable, unlike unsecured personal loans, which have fixed rates.
You also might also have to pay other charges, such as an arrangement fee which may include a property valuation fee.
Again, these charges have to be added to the interest you pay when calculating the best homeowner loan for you.
The big advantages of homeowner loans over personal loans are that they usually allow you to borrow more money over longer periods of time (between three to 25 years) and usually up to the equity you have in your home. You might still get more than this, albeit at a higher interest rate.
Because you can pay the loan back over a longer period, then the monthly repayments can be more manageable, helping you control your finances better, however if you don’t keep up repayments your home can be at risk. So think carefully before you commit.
The interest rate on a secured loan can be lower than for a personal loan because of the extra security. However, this is not always the case, so you do need to check what rates are available to you.
Find the best secured loan quote for your circumstances
For most of us, a house is the best security we have. If the value of your home is greater than the mortgage you owe on it – you own part of the house and have equity – then you can usually re-mortgage to raise cash. If you have a good record of meeting payments on your mortgage, then you are likely to get a quick decision.
There can be fees for re-mortgaging, and you have to take these into account when weighing up the cost. A key advantage in many cases of re-mortgaging is the flexibility to make overpayments, so you can clear the debt as soon as you can and cut your interest bill.
The interest rate can also be lower than that on offer from personal loans, but you still need to check this. To see whether your mortgage is competitive, click here to get advice on the best mortgage product for you
The most flexible way to borrow for those who can repay quickly is an overdraft. But use them with caution as there can be some pretty hefty charges and interest to pay if you do go overdrawn.
Some overdraft facilities are free whist others may for charge interest on the money borrowed. But if you can repay in full in a short space of time – such as when your pay cheque goes through – then this is a quick and easy way borrow some extra money. The interest rate may be high but it’s over a very short time with no redemption penalties.
How much of an overdraft you can negotiate depends on your bank, how long you’ve had the account and how much you pay in every month. The charges you need to look out for are annual fees for setting up overdrafts, fees for going over your limit and monthly charges.
To find the best current account check out our best buy tables.
0% introduction purchase rate credit card
If you need to buy and item and cannot pay for it immediately, then a credit card with a 0% introduction rate could be the solution. These introductory rates can be for periods up to 12 months.
This is one way of borrowing interest-free. This might be the case, for example, if you need to borrow for Christmas presents or pay for a birthday treat but don’t have the immediate funds to cover the purchase. As with all debt your aim should be to pay it off in the shortest time possible,
To find the best 0% balance transfer credit card for your circumstances have a look at our best buy tables
If you only want to borrow a smaller amount of £80 to £750, and will be able to pay it off at the next payday or the one after, a payday loan offers another quick and easy solution. They can be arranged within a few hours over the telephone or online.
Even those with an adverse credit history can qualify provided they can prove they can pay off the loan at the arranged time. Payday loans might be good to use in emergencies, but you should use them with caution because the interest rates are high.
To get a Payday loan quote fill in our simple online form
Weigh up the costs
Whenever you borrow money you should add up all the interest and fees payable under the different methods and see which is the best solution for you.
Whatever you do remember you generally pay less the sooner you clear your debts – so be debt-free as soon as you can!