Know your rights - ways to borrow

Different ways to borrow money

There are many different ways to borrow money including credit card borrowing, mortgage and debt consolidation loans, bank loans, loan finance and bank overdrafts. Choosing the correct method will depend on your circumstances, the purpose of the loan and when you intend to repay it.

Credit Card Borrowing

Credit Card Borrowing is generally the most expensive form of borrowing available and should only be used in situations where you can repay the money over a very short period of time - a maximum of 6 months. In some circumstances you can get interest free borrowing on credit cards but you should only use this if you have the money available to pay the balance off at the end of the introductory period.

Mortgage Borrowing secured on your home

In terms of interest rates this is usually one of the cheapest forms of borrowing as it is secured on your home. However, this means that if you do not keep up your repayments on the loan then you may lose your home.

There are usually costs of several hundred pounds involved as it will often involve a valuation by a third party of your home. This is best used to borrow larger sums of money for a specific purpose such as home improvements.

Remember, however, that although the interest rate is low it is usually spread over the long repayment period of your mortgage which can be up to 25 years. This means that the actual amount of interest you pay may be quite significant.

Consolidation Loans

Consolidation loans are usually secured on your home like a mortgage and usually involve transferring debts with higher interest rates into one loan with a lower interest rate - the rate should be lower as the lender has the security of your house as a guarantee of repayment whereas other loans with higher rates have not.

Debt consolidation loans may be a good thing if you have a lot of expensive borrowing on things like credit cards which carry high monthly repayments and high interest rates. Remember though that you may be putting your home at risk and will usually only be available to you if you have a reasonable surplus between the value of your house and any existing mortgage or loans on it,

Remember also that whilst the monthly repayments on these loans may be lower than your other loans put together this may only be because the loans are repayable over a much longer period of time. Again the overall cost of the loan over the entire period can be quite high.

Bank Loans and Loan Finance

Bank Loans and Loan Finance are usually appropriate for borrowing larger amounts of money for the purchase of a particularly expensive item such as a car and will be repaid over a fixed term over periods of up to 10 years. The interest rates will usually be lower than a credit card but higher than a mortgage.

Overdrafts

A bank overdraft should only be used for short term borrowing of relatively small amounts of money. Interest rates are usually higher than a loan especially if it has not been agreed with your bank first.

If you find you have a permanent overdraft it may be possible to reduce your interest payments by taking out a bank or other loan to repay the overdraft. You may be able to take advantage of one of the many 0% interest offers some credit card offer. But remember - once the initial interest free period is over, the interest payable can rise to very high levels. Also, if you wish to repay a loan earlier than planned there may be penalty costs whereas an overdraft can be repaid at anytime without penalty.