Choosing your lender

Okay, so you’ve decided to borrow money. It’s important to look closely at the lender you choose. People borrow from lots of different sources – friends and family, their own bank as a loan or overdraft, a separate loan provider, and even supermarkets offer loans. You can also have debt with credit cards or store cards or with pawnbrokers.

A word on borrowing from friends and family, known as informal lending. Borrowing off your mum or sibling might well be the most simple and cost-effective option for you. But you must consider the fallout if you don’t repay. Relationships can get very strained when money is involved.

A particularly problematic area is when family members use other people’s names for credit products, like a buy now pay later or a loan on behalf of someone. It is illegal to borrow on behalf of someone or use their name as a guarantor without their consent. Failures to repay products can have lasting impact on the named person’s credit rating, not just the relationship.

Borrowing from friends and family is common, but you need to be very careful. If you are approached by or introduced to someone you don’t know personally who offers to lend you money informally, this is illegal and sadly is on the rise. Any formal loan involves a process where your details and affordability is thoroughly checked – if this doesn’t happen you should be suspicious.

Often these interactions start off in a friendly way, but then can take a turn for the worse. If you borrow money like this, you have very few protections available to you and often intimidation or violence are used with difficulties making repayments.

Also, be aware that doorstep lending is only legal if you’ve requested the visit. When someone knocks on your door offering loans you haven’t asked for, this is illegal.

If someone who has lent you money, threatens you or is violent, contact the police straight away. If you think you’ve borrowed money illegally from a loan shark, there are organisations to help.

There are, however, options that are legal, safe and where affordability is taken seriously.

All legitimate money lending in the UK is regulated by the Financial Conduct Authority, the FCA.

This means that the lenders have agreed to behave by a certain set of legal standards. The FCA makes sure that lenders follow the rules and treat people fairly.

You can borrow money in a variety of forms – overdrafts, buy now, pay later schemes, credit cards, personal loans from a bank, building societies or credit unions. If your credit record is poor or patchy, you might consider using Community Development Finance Institutions or CDFIs, also known as community or responsible lenders.

CDFIs offer those with poorer credit histories more flexible, fairer and cheaper credit than high interest or illegal lenders and pawnbrokers. On average, CDFIs make short-term loans of around £400 to £500 and customers can save about £200, compared with borrowing from alternatives.

CDFIs can also offer additional support to help you manage your personal finances. So when considering who to borrow from, take your time, do your research and always read the small print. The government has a list of accredited CDFIs at gov.uk. You can use online tools to search for a local CDFI that is a member of Responsible Finance.

For members of the armed forces community, there is another dedicated option. Since 2015, the Ministry of Defence has supported Joining Forces Credit Unions (JFCU) – a not-for-profit scheme that helps serving personnel, veterans, family members and Defence civil servants to save and borrow responsibly.

It’s open to regulars, reservists, veterans, military families and defence civil servants. One key benefit is that loan repayments can be taken directly from your military pay or pension, which can make budgeting much easier. To find out more, you can visit the Joining Forces Credit Unions website.

Choosing the right lender matters as much as choosing the right loan. Stick to regulated lenders, be cautious with informal borrowing, and know that safer, fairer options are available. For an overview of the different ways to borrow and how each one works, watch our video on borrowing options.