Borrowing options

There are different ways to borrow money. Each one carries a different risk. All of these types of borrowing show up on your credit record, which other lenders can see.

Borrowing is common. Mortgages, mobile phone contracts, Forces Help to Buy, car finance, and credit cards are all forms of credit that many people use in everyday life.

Not keeping up with payments will affect your credit score. This may make it harder to borrow money in the future.

One of the most common forms of borrowing is an overdraft. This is when you spend more money than you have deposited in a bank account. There are two main types: an arranged overdraft and an unarranged overdraft.

An arranged overdraft is one that you have agreed with a bank before using. Often the bank offers you this, but sometimes you’ll have to ask them first. This is the cheapest type of overdraft.

An unarranged overdraft is when you spend more than you have without asking first. The bank covers it, but they’ll probably charge you more for the trouble, so this type is more expensive than an arranged overdraft.

Overdrafts can be useful if you need a quick backup, but if you rely on them too much, the bank keeps charging you while you’re using it, and it almost certainly won’t be the cheapest way to borrow. And if you’re earning and spending the same amount each month, without clearing the overdraft, you’ll slowly creep further into it until it becomes a much larger problem.

Credit cards are another common form of borrowing. These can be with your bank or with another provider. You receive a card with a credit limit. This is the amount the provider has agreed to lend you.This limit is decided based on a range of factors, including your income and your credit rating.

If you are serving or have served in the armed forces, building up or maintaining a credit history can sometimes be more difficult. Frequent moves, overseas postings or using a British Forces Post Office – or BFPO – address can mean lenders’ systems don’t always recognise your address history the same way as civilian addresses.

Because of this, major UK lending organisations have agreed that service personnel should not be disadvantaged because of their occupation. Applications should be treated fairly and must not be rejected automatically simply because a BFPO address is used.

If you’re applying for credit, it can help to explain your circumstances clearly. Applying in person or over the phone, where possible, allows you to explain postings or overseas service directly.

You can get guidance on applying for unsecured credit for service personnel. Find a link to the guidance below.

A credit limit is the agreed amount you can owe on the card when you take it out. Staying under the credit limit means that the total of what you’ve spent, plus any interest or charges the provider has added, never exceed this agreed amount.

Sometimes borrowers confuse a credit limit with a spending limit. They are not always the same thing.Your credit limit is the maximum amount of borrowed money you can use. However, your card provider will also add extra costs onto your account, such as interest fees, late payment charges, or annual fees. If you spend right up to your limit, these extra fees will push your total balance over the agreed maximum amount. This can result in penalty charges or a damaged credit score. To stay safe, always leave some breathing room on your card for these fees.

Credit card interest has no legal cap, but common rates can range from 0% right up to 25% APR. Comparison websites can help you find the best deal.

With credit cards, you are offered three main ways to repay. Firstly, you can pay off the whole balance in one go (clearing everything you owe). This is the cheapest option, often free if you pay in the same month you borrow.

Secondly, you can pay the minimum amount which is set by your provider. This is often where problems can arise, as the minimum amount often isn’t enough to stop big credit card debts from growing rather than shrinking.

The provider adds interest every month. Sometimes the minimum repayment amount doesn’t cover this – so you end up owing more with each month that passes. This is when the concept of compound interest works against you. You can learn more about compounding in another one of our videos.

The third is paying an amount you set that covers the minimum with some more on top. This is the best option when you’re trying to clear a balance. You add whatever you are able to spare to the minimum payment and this is what you pay.

Using a credit card occasionally isn’t a cause to worry. But if you’re finding that you are struggling to pay the minimum, you should call the provider early to discuss your options.

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Some people choose to use a credit card instead of a debit card for big things they can already afford, like a holiday or a new TV. If the bill is paid off in full straight away, it costs nothing. The reason some people do this is because credit cards can offer extra legal protection, called Section 75.

If a company goes bust or you get scammed, the card provider may help you get your money back more easily than if you paid by debit or cash. This can add a layer of security to your money on transactions between £100 and £30,000, as long as the balance is cleared and no interest is charged.

Personal loans are a financial product separate to your bank account or credit card. You can ask the lender to borrow a certain amount. They do some checks on you before confirming this amount or sometimes offering you a different sum.

There’s always a cost involved in personal loans reflected in the APR. When you take one out, you agree to pay it back in regular instalments, usually by paying a set agreed amount each month.

It’s worth doing a lot of research before taking out a loan like this. And note that in some cases, particularly if you need under £3000, a credit card may be cheaper.

If you’ve been turned away from high street banks and mainstream lenders, you could also check out your local credit union, a non-profit organisation that allows people within the community to borrow money. Credit union loans are usually cheaper than the alternatives – payday loans and doorstep lending – and come with guidance if you’re in financial difficulties.

In recent years, we’ve seen buy now, pay later – another credit option promoted more through high street retailers. Buy now, pay later schemes do exactly what they say. They offer you the opportunity to buy something without having to pay for it until a later date.

This lets you spread payments over an agreed number of weeks or months, often with no interest if you pay on time. For example, you could be required to make repayments every two weeks for up to three months.

If payments are late, fees and interest can add up. It’s also easy to overspend and missing payments can mean damage to your credit score. A common trap here is to take on more than one buy now, pay later product at the same time.

With these products the risk isn’t just what you borrow – it’s how many plans you’re juggling. So take your time to make sure this is right for you.

You might have buy now, pay later agreements with multiple companies. Some weekly, some monthly, and without one central place to see them all, it can become a real challenge to keep track. This tends to be how payments are missed.

You may from time to time need to borrow money. Most of us do. Just remember to be aware of the real cost of borrowing beforehand, including how it can change your credit score, which will affect your ability to borrow in the future.

Understanding the fees and interest rates will let you know exactly how much this is really going to cost you. Be particularly careful around anything with high interest.

There are lots of different ways to borrow, and each one works a little differently and carries different costs. Taking a moment to understand the option you’re using – especially the APR and repayment terms – can help you avoid surprises later and make your borrowing more manageable.

It’s always important to read the terms on any loan and be confident you can afford the repayments before you take on debt. For more information on this, check out our video on managing repayments.