Types of Borrowing


author image-chloe
By Chloe Dickenson
Updated on Tuesday 2 February 2021

Signing a loan agreement

When it comes to borrowing money, there are many different types of lending that you might want to consider, but it’s imperative that you look into the pros and cons of as many options as possible before you commit to one, to make sure that it's right for you and suits your specific situation.

If you’re currently wondering whether you should borrow money, the different methods of borrowing available to you, as well as finding out your borrowing eligibility, we’ve put together some top tips and advice for you below.

Ways of borrowing money

Below, we’ve outlined some of the most common ways of borrowing money.

Overdrafts

Overdrafts are one of the most popular means of borrowing money as they’re pretty simple to arrange. You will need to talk to your bank to arrange an overdraft, which is just an extension of funds, meaning you can take out/spend more money than what is actually in your bank account.

However, it’s important to remember that this is just a short-term loan and just because the bank has provided you with more money than you have available, it doesn’t mean that you won’t have to pay it back.

Not only will you have to pay this money back, but there’ll also likely be added interest to pay too.

Credit cards

Credit cards are another common way to borrow money. These too are short-term loans that enable you to spend money on your credit card and then pay it off at a later date.

Credit cards often also charge interest on repayments, particularly if you don’t make your repayment within the agreed-upon timeframe. If you do decide to borrow money by using a credit card, ensure that you meet the minimum monthly repayments to avoid having to pay excessive interest rates.

Whatever credit card you do get, be sure that you fully understand the terms and conditions regarding what's expected of you when paying the money back. It could likely be that if you only pay the minimum required payment, you will be subject to interest on the rest of the money, making the overall amount to repay more expensive than what you actually borrowed.

Unsecured personal loans

This type of borrowing is usually used for larger purchases such as a new car and involves borrowing a fixed sum from a lender which you then have to pay back in regular installments.

While you might think that this is a good type of loan, especially if you’re able to pay it off sooner than you expected, you can actually sometimes be penalised with extra charges or interest rates if you try to pay it off early, so always do your research when looking for unsecured personal loan providers.

Learn more: A Guide to Personal Loans

Mortgage

Mortgages are usually the most popular type of borrowing method when it comes to house purchases.

They are a type of long-term loan that is secured against your house, that come with monthly repayments. Failure to make your mortgage repayments could result in your home being taken off you, so it’s imperative that you can afford to make your mortgage repayments each month.

You might like: Can I Get a Mortgage with Bad Credit?

Payday loan

These types of loans are very short-term and are usually used to tide you over until your next payday if you’re running low on funds for the month.

They often come with very high-interest rates, meaning that when you can afford to pay the loan back, you’ll have to pay a lot of added interest with it.

Payday loans can be helpful if you’re in need of immediate cash until you get paid, but it’s imperative that you pay them back as soon as possible and make sure you have enough money to make the repayments. Generally, they’re not ideal for long term borrowing.

Student loans

Student loans are a type of long term borrowing, taken out by students to pay for college or university.

In the UK, student loans must start to be repaid once the borrower has reached a minimum salary threshold; until then, they don’t have to start paying it back.

Student loans can be used to pay for whatever the student sees fit, but they’re most commonly used to pay for tuition fees, accommodation, food, books and other academic-related fees.

Doorstep loans

Doorstep loans are another type of short-term borrowing, somewhat similar to payday loans, but they usually involve cash being delivered straight to your door or paid into your bank account on a very short term basis.

They can cost an awful lot to repay and are typically repaid in weekly installments. Lenders will come to your house to collect your repayments, hence the name of this type of loan. Having said this, many can be done online or over the phone now.

Building society loans

Building societies operate in a similar way to banks in that they can loan money in the form of personal loans, mortgages and credit cards.

It can sometimes be more difficult to obtain a building society loan as they are generally thought to be more rigorous in their lending, but it’s worth checking out your local building society if you’re looking to borrow money.

Credit unions

Credit unions are another type of financial institution that lend money to people, but they are considered to be a community lender, so they can be used by pretty much everyone.

As they are not-for-profit organisations, credit unions often offer lower interest rates, better savings rates and reduced fees overall for their members.

Tips for borrowing sensibly

You need to ask yourself “am I eligible to borrow money?” before you even really start to think about researching the best types of borrowing available to you.

Make sure that you’ve looked through your credit file and credit report to see if the lender would grant you eligibility and ensure that you’ve weighed up all the pros and cons before committing to a certain type of loan or means of borrowing money.

There are a few tips that you should bear in mind when it comes to borrowing and you should always borrow sensibly, fully aware of what it means and what you will be eligible to pay back and when.

  • Don’t borrow more money than you need.
  • Always research the best method of borrowing that’s suitable for you.
  • Check your credit rating and credit score before you apply to see if you’d be eligible.
  • Take a look at the monthly repayments and see if you can realistically make them.
  • Take advantage of the interest-free period (if there is one).

Related guides


Latest News