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, 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. Borrowing from friends and family is one thing, but you need to be very, very careful. If you are approached 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.

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 when dealing 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. With this option, your personal circumstances and affordability are taken into account.

CDFIs offer 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. They want to support your financial wellbeing. 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.