Shakespeare coined the phrase: ‘Neither a borrower nor a lender be.’
In today’s expensive times, however, it is sometimes necessary to borrow money over the short or the long term, in order to achieve our financial or life goals.
Loans come in many forms, from personal loans and credit cards to newer Buy Now, Pay Later schemes such as Klarna.
Some are more expensive than others and opting for the wrong type at the wrong time could leave you paying lots of interest, ruin your credit rating, or even – in extreme circumstances – lead to you losing your home or car.
If you are considering borrowing money, here’s a guide to some of the best ways to do it, the possible pitfalls, and how to decide if you can afford it…
There are many different reasons why you might need a loan. Some are relatively obvious and necessary, such as to buy a house with a mortgage.
Others might be more discretionary – to purchase a more expensive car or a new kitchen, for example.
In some cases you may need to borrow money in an emergency, or to deal with a difficult situation, perhaps to consolidate a number of debts you have incurred.
Rachel Springall, finance expert at money data business Moneyfacts, says this time of year is a particularly strong one for loan sales, with consumers wanting to take on home improvement projects, or consolidate Christmas debt.
However, she says it is important that customers consider the different types of borrowing available before making a decision, and also to check their budget and credit report to ensure they aren’t borrowing more than they can afford or getting an expensive rate.
‘Any consumer struggling with debt should seek out advice and contact their lender at the first instance but, if it worsens, seeking help from a debt advice charity is wise,’ adds Rachel.
The following are some of the different types of loan available, and we have highlighted some of the factors determining whether each might be a good or bad idea for you…
A personal loan
What is it?
A personal, or non-secured, loan is an amount of money lent to you and then paid back over a set period. That period is usually longer than if you used a credit card, and the loan is known as non-secured because none of your assets, such as car or home, is at risk if you do not repay the loan.
A good idea?
‘There are certain situations where only a personal loan will do,’ says Adrian Lowery from Bestinvest. ‘They are available in much larger amounts than the limits on credit cards for most people, so they tend to be a popular option for large, planned expenses like weddings or home renovations.’
Some people might opt to remortgage their home instead for a big project, but Lowery says a loan is quicker and cheaper to arrange than a remortgage, and with the current lowest rates at 2.8%, the interest charged is comparable.
When to avoid it:
A 0% credit card could be a cheaper option on small balances, if you’re disciplined about paying it off. A personal loan should also be avoided if you are not sure how you’ll finance the repayments.
Rachel Springall, at Moneyfacts, warns that those who do not have a good credit rating may end up paying higher interest than the advertised rate.
‘It is always wise to review your credit report before applying and be mindful that you may not get the offer or rate advertised, as the representative APR is only given to at least 51% of successful applicants,’ she says.
The products available:
According to Moneyfacts, many lenders – including Tesco, TSB, and MBNA – charge 2.8% over ten years, which is a £178 monthly repayment on a £10,000 loan.
A credit card
What is it?
Many of us use credit cards for everyday spending, and then pay them off in full each month.
There are advantages to this – you are not charged interest on your borrowing, and you benefit from extra protection if the company you buy from goes bankrupt and the item is worth more than £100.
It’s also possible to use a credit card for longer-term borrowing, sometimes at very low interest rates or none at all.
This borrowing can come in the form of a purchase card that you then pay off over time, at either 0% interest or a very low rate, or in the form of a ‘balance transfer card’ on to which you can move existing debt at low or zero interest, giving you breathing space to clear it.
In general, to transfer a credit card debt on to a balance transfer card you pay a percentage of that debt in order to do so, usually between 2% and 4% of the transferred amount.
A good idea?
Adrian Lowery says credit cards are preferable to personal loans if you want to borrow money for a short amount of time, and if you have an excellent credit rating.
‘The best 0% credit cards currently allow interest-free balances on spending and balance transfers for up to two years,’ he says. So if you think you can clear your debt in that time, they may be a good idea.
When to avoid it:
If your credit rating is poor from past debt, you may struggle to get a balance transfer or 0% purchase card at a good rate.
Also, if you do not have a plan to pay back what you owe, you are simply pushing the debt down the road with a balance transfer.
Lowery says these cards are for the disciplined, who are able to ‘set their own monthly payments at a level that pays off the balance in time’.
If you need someone else to ensure you make payments, a personal loan may be a better choice.
The products available:
Bank of Scotland and NatWest both have a 0% balance transfer card with no transfer fee for 22 months and an APR of 21.9% after that.
Tesco Bank has a 0% purchase card which gives you up to 23 months to pay back the debt before interest is charged.
‘I bought a works van on a zero-interest card but I had to be disciplined about it’
When Jo Blood, who runs ergonomic chair business Posture People, needed a new van for her work, she asked her accountant about the best way to finance it.
‘We looked at various options such as a bank loan, vehicle finance etc, but then our book-keeper suggested that we buy it on a credit card,’ recalls Jo.
‘Once we had stopped laughing, she explained that she’d found a card that
offered three years interest-free. So we bought the van and split the whole cost of it into 36 payments, and paid off the total in the three years with no interest.’
Jo says that while the strategy worked well for her, as she paid no interest on her debt, she cautions it is not a good idea for over-spenders.
‘You have to be quite disciplined and not use the card for anything else. We just put the card in a drawer until the three years were up, then closed the account.’
Buy Now, Pay Later
What is it?
Products such as Klarna and Monzo’s Pay Later scheme let you split the cost of your items into smaller chunks and pay over time, or simply delay financing for 30 days with no additional cost.
A good idea?
If you are ordering a lot of clothing to try on and are on a small budget, services such as Klarna mean you don’t have money taken out of your bank account for things you won’t keep.
Lewis Potton, editor at student finance magazine Student Beans, says these services are ‘a great way of trying items before committing to fully purchasing them – a trend more evident during the pandemic era, when facilities such as fitting rooms can be limited.’
If you have a poor credit rating and can’t get a loan, some Buy Now, Pay later (BNPL) services are easy credit to get, as they don’t often check your credit score before offering the products.
If you are a very disciplined person who will remember to send back unwanted items and diarise the repayments needed, then these schemes could work for you.
When to avoid it:
Many people have ended up in financial trouble due to BNPL schemes.
Recent figures from debt charity StepChange show that those who use these schemes are more likely than the rest of the population to be experiencing financial difficulties.
People with two BNPL loans are twice as likely as all adults to say they are finding it difficult to keep up with their household bills and credit repayments, the charity found.
Phil Andrew, chief executive at StepChange, says this form of credit is ‘deliberately marketed and presented – often to less financially experienced consumers – as a means of payment rather than as a form of credit, which is what it really is.’
He adds that it is still relatively easy to build up large amounts of BNPL debt due to minimal regulation.
In addition, this type of credit is not suitable for those wanting to use evidence of debt repayment to build up a better credit score, suggests Ziad El Baba, general manager at credit reference specialist Credit Karma.
‘Most Buy Now, Pay Later companies don’t report to the credit bureaux,’ he says. ‘Responsible borrowers won’t likely see their credit scores improve as a result of making regular, on-time repayments, as they would with other forms of borrowing.’
The products available:
Buy Now, Pay Later is usually offered as an option at the checkout stage on retail websites, together with credit and debit card payment methods. Companies from Asos to Joules use Klarna, which offers the chance to pay for a product in three
instalments or after 30 days, depending on the retailer.
PayPal, available at many retailers, offers you the chance to pay for a product in three interest-free stages. Other similar services include Clearpay, which allows you to pay over six weeks.
Mortgages
‘We’ll work to be mortgage-free as quickly as possible but finding a lender’s not easy’
Self-employed safeguarding expert Kate Young, from safeguarding association.com, is trying to buy a house with her partner – who works as a sound engineer on cruise ships.
Because of the nature of their roles, borrowing money for a mortgage is more complex than for most employed people. ‘We’re finding it tricky, mostly because our mortgage adviser needs so much more information from us,’ says Kate.
‘It’s about trying to make ourselves as attractive to mortgage companies as we possibly can. But we’re both in our forties, so it’s not the easiest place to be. And the housing market isn’t helpful.’
Kate and her partner, who are moving back to the North-East from rented accommodation in southern England, say they aren’t concerned by the added debt they are aiming to take on. ‘It’s just the way it is,’ she says.
‘Ideally, we would then work to become mortgage free as quickly as we possibly could, which is always easier when you’ve got a finite number,’ adds Kate.
‘You know what you’re working towards – so it doesn’t worry me taking that on.’
What is it?
Most of us are familiar with mortgages – loans of very long duration that are used to buy our homes.
The typical mortgage used always to be 25 years long, but some now last far longer, as borrowers grapple with affordability.
It is also possible to re-mortgage – to borrow more money against your home if it has increased in value since you bought it – in order to raise cash for home improvements or other changes.
A good idea?
Obviously, most of us need a mortgage to buy a house, unless we’ve amassed substantial sums, so mortgages tend to be a necessity.
When it comes to bigger renovation projects, too, Adrian Lowery, personal finance expert at investing platform BestInvest, says remortgaging can offer value – particularly with interest rates so low.
‘For big home improvement projects, above say £20,000, a remortgage to free up some equity is probably the most sensible option, particularly with mortgage rates so low,’ he adds.
When to avoid it:
If you are borrowing smaller amounts, the fees for a remortgage can be high, particularly if you are on a fixed rate with an exit fee, which means you will have to take out an extra mortgage product if you want to borrow extra money. In these cases a loan, or even using a credit card, can be cheaper.
Lowery also cautions that you must be particularly sure you can meet the repayments if you are remortgaging, as the extra borrowing is secured against your home.
‘While it makes sense to many people to fund improvements to an asset from credit raised against the asset itself, if the very worst happens and you default on payments, the consequences are more far-reaching than they would be with a personal loan,’ he warns.
The products available:
For those with high amounts of equity, or a large house deposit, mortgage rates can be very low.
The average two-year mortgage rate is 2.4%, according to Moneyfacts, but some mortgages for those with a 40% deposit are priced at just over 1%.
Save money with Snoop and get a £5 Amazon voucher:
Money-saving app Snoop has teamed up with Metro in a new customer offer of a £5 Amazon voucher for readers. All you have to do is start using the app and save! It’s a win-win.
Simply download the app using the link below, connect at least one bank account and then use the app for a month.
Snoop will then send you the Amazon voucher. Like a guardian angel for your finances, Snoop’s clever AI keeps on top of your money so you don’t have to.
Connect your bank account and any credit cards to Snoop — and the app finds smart ways to save you money at the places you spend regularly. Snoop monitors your bills, warns you when they’re going up and helps you track your spending in the way that makes sense to you.
Snoop already has more than 200,000 customers and was named ‘Best Innovation’ at the 2021 British Bank Awards. What are you waiting for? Start saving today.
For more information, visit snoop.app/metro
Do you have a story to share?
Get in touch by emailing MetroLifestyleTeam@Metro.co.uk.
MORE : How much money can you withdraw from an ATM? Maximum for UK banks
MORE : Follow this month-by-month money calendar to sort out your finances in 2022
MORE : This smartphone budgeting hack will help if you struggle with money
