The UK now has one of the highest levels of personal debt in the world – in April 2011 the British people collectively owed over £1,460bn in private debt.
And you’re probably part of those figures – whether you have a credit card, a student loan in repayment, or an overdraft you’ve dipped in to more often than you care to remember.
Yes, borrowing money can be useful, and sometimes you need to get your hands on cash quickly. There are many ways you can do that – but treat all of them with caution. You may think that borrowing money may be a good short-term solution to a debt problem. Of course, that depends how much debt you’re in. There are lots of places you may be able to get hold of money readily, but some may create more issues than they solve.
Before deciding to borrow money it’s important to work out whether you’ll be able to repay it in the future – so look closely at your budget plan. If your spending exceeds or is close to your income already, think very carefully about whether you really can afford to borrow more.
Also bear in mind that paying back loans and credit cards may become a problem if, for example, interest rates go up or you lose your job.
So where might you be able to borrow money from?
The very thought may make your toes curl with embarrassment, but if you have someone close to you who can afford to lend you enough to cover your debt, that might be the simplest thing to do. They (probably) won’t charge interest, and there’s no paperwork to complete. However, if you can’t repay it according to the terms you negotiate, this can create problems. (And they can still take you to court if you don’t pay it back!)
This may seem an easy option too. When you pay for goods or services with a credit card, you’re billed once a month and usually have a further month in which to pay, so this can be a useful, flexible form of short-term borrowing if you can repay your bill in full each month – and after all, banks are falling over themselves to offer customers credit cards with all sorts of favourable terms.
Think twice, though – there’s a reason for their pushiness. Interest (check the APR, or annual percentage rate), can be very high. If you don’t repay the bill in full you’re charged interest on the whole amount – including the part you have paid off. So that means you should only really use a credit card if you know you can afford the repayments; if you can’t your debts can quickly spiral out of control, and you’ll be in a worse fix than you were to start with.
The UK payments association (www.theukcardsassociation.org.uk) offers an impartial guide to choosing and using credit cards – including understanding ‘APR’ and comparing deals.
If you do decide to get a credit card, you will be able to choose (subject to your card’s terms and conditions) how much you spend; how much you borrow; how long you borrow for; and how much you will repay each month, from the minimum repayment amount up to the full outstanding balance.
Many credit cards give you some period of interest-free borrowing for purchases, as long as the bill is paid in full every month by the payment date, although this varies.
Used appropriately, credit cards can provide free short-term credit, as long as you always pay your bill in full and on time. They are of course a really convenient way to pay for goods and services, particularly over the internet, by telephone or by mail order, both in the UK and almost anywhere else in the world. They also offer some security because they give you protection against fraud – if you are the innocent victim of fraud when using your card you won’t have to pay. Some card issuers also give you incentives, like loyalty points or another rewards scheme.
However, credit cards are sometimes used irresponsibly. That can mean your debt levels increase as you spend more and more and run up further charges if you’re late with a payment, miss a payment altogether or go over your credit limit. If you do keep making late payments or miss them, you’ll damage your credit rating. And there’s a danger that you keep taking out more and more credit cards to pay off other credit card debts, and your entire financial situation will spiral out of control. So be careful. If you think you’re likely to spend irresponsibly with a credit card, then don’t get one.
You’ve probably found yourself at the till in a store and the assistant’s given you the spiel about taking out the store’s own card and getting a discount on future purchases or something like that. Well, store cards work in the same way as credit cards, except you can only use them in the store/group of stores that issues the card, and the interest rates tends to be much higher. Using them may entitle you to special offers that other customers can’t get – that’s how they try to lure you in.
If there’s something specific you want to buy, such as a new washing machine, hire purchase may be an option. With hire purchase you make monthly payments (which include interest) for the item you buy, but you don’t own it outright until you’ve paid back all the money you owe. The HP company can claim the goods back if you don’t make your payments.
It can be easier to get credit from an HP company than a bank or credit card company, but it’s usually a more expensive way to borrow. Always shop around for the best hire purchase deals.
You’ve probably heard the slogan ‘buy now pay later’. Sounds good, yes? But if you don’t make the payment by the due date, you’ll end up paying interest – usually at a high rate – on the whole amount, so look out for this. Many credit companies rely on the fact that you won’t be able to make the full payment on time. If you decide to buy this way, you’re advised to keep a note of all your payments and the date you made them.
If there are lots of little things you want to buy, when you buy through a catalogue the goods are delivered to your door (saving you a trip to the high street) and you can usually spread the cost of your purchases over a series of small weekly payments. This may be convenient, but bear in mind that the price of the items may be higher than you can get them elsewhere. Check the interest charge – it may be a lot higher than typical loan/credit card rates.
Be very wary about these. You’ve seen the ads on television, promoting is a small, short-term loan that is intended to cover you until your next payday – but have you paid attention to the small print? Again, these finance firms will be imposing a huge APR, and when you’re repaying a short-term loan quickly and with interest, it soon eats into your income. Beware.
Chartered financial planner Justin King of MFP Wealth Management explains: “Payday loan companies have been trying to move away from bad press, but it’s smoke and mirrors. You see people in the adverts enjoying an ideal life, but that’s not the reality. Yes, you’ll borrow the money and pay it back with interest, but making the loan repayment from your next pay packet may be a big chunk out of your income. So it keeps going – if you can’t pay it back, you may borrow more from elsewhere to cover that debt.”
An overdraft allows you to spend more money than you have in your bank account, up to an agreed limit. You only pay interest on the overdraft money you use, and you don’t have to tell the bank what you’re using the money for.
If you go over that limit, or go overdrawn without arranging it with your bank first, you may have to pay a penalty charge and a high rate of interest. Your bank will probably charge you for sending you a reminder letter, and for any payments you put through the account. The bank may also freeze your account until the overdraft is paid off – which will mean you won’t have access to any money, such as your salary, paid into the account.
Some banks also charge a monthly fee and a fee for setting up the overdraft, so it can be expensive if you borrow a lot of money and don’t pay it back quickly.
A loan is a formal arrangement, usually for an agreed, fixed period of time, and it can seem like banks are falling over themselves to offer you the opportunity to borrow more money from them. As always with banks, there’s a reason for that – you need to make monthly repayments, with interest. If you’re thinking about taking out a loan, you’ll need to agree with your lender how much money you can borrow, how long you can borrow it for, and how much interest you’ll pay. Penalties are stiff if you miss a repayment.
Note: this is all just for guidance. If you are in financial difficulty and/or considering any of these options, it’s probably worth taking a proper look at your finances with a professional.