From time to time, you might need money in hurry. This could be due to urgent home repairs, a car breakdown, a much-needed holiday, finding a deposit on a new rental flat, or coping with a relationship breakdown.
Rather than rushing into borrowing, it’s a good idea to think about how long you will need the money for, and how best to pay it back. Making the smart choice when you need short term cashflow will help prevent you from getting into money difficulties later.
When you look at the cost of borrowing, don’t just look at the interest rate. Be aware of whether there are any fees or extra costs involved.
First, check whether the interest rate you are being quoted is the Annual Percentage Rate (APR).
This shows the total amount of interest (including charges or fees) you’ll pay on your borrowing in one year.
There are a couple of things to watch out for. If interest rates move upwards, your borrowing interest rate may also increase, unless it is fixed for the term of the loan. An interest rate that can move is known as a “variable rate”.
Second, if you are applying for a credit card or personal loan, the advertised rate might be an APR of 12.5 per cent. That isn’t necessarily the rate you will receive. Depending on your credit worthiness, you might be offered a higher interest rate, making your borrowing more expensive.
When it comes to mortgages, the APR that the bank or building society quotes includes all the interest costs plus any arrangement fees.
You should also watch out for any early repayment penalties – overdrafts and credit cards don’t tend to impose these terms, but you may get charged a fee if you try to repay a mortgage or loan early.
An unsecured loan is for a year or more, fixed at a specific interest rate. It is not linked or tied to any assets you own, although the rate you are quoted will be based on your credit worthiness.
A secured loan is held against the value of your house. It is intended as a long term commitment rather than as access to short-term cash.
If you are planning to remortgage in order to release cash, for example for a home improvement project, check whether you can really afford the increase in repayments should interest rates rise later this year.
Unsecured loans are more risky for lenders because if you default or fail to pay the money back they don’t have the security of being able to claim on your home.
This means they are usually more expensive than secured loans like mortgages, and the amount you can borrow is usually lower too. As a borrower, though, your home is not at risk with an unsecured loan.
With a personal loan, the longer you are borrowing the money for, the more you are likely to pay in interest.
Although credit cards help manage issues with short term cashflow, always make sure you have a plan to pay off the borrowing before you sign the contract.
If you only make the minimum payment every month on your card then you’ll only be paying off interest, rather than tackling the underlying debt. You’ll still have the problem of what to do with the debt at the end of the interest free period.
Getting an overdraft extension is one of the simplest ways to borrow money for a few weeks or months. Most current accounts offer overdraft facilities and you may, for a fee, be able to extend your overdraft.
If you go down the overdraft route, it’s much better to talk to your bank first. Authorised overdrafts, which have been approved by your bank, are much cheaper than unauthorised overdrafts, where charges can rack up quickly.
Again, make sure you have a repayment plan. Borrowing money without having a plan to clear your debt does not make financial sense.
When lenders assess you for a loan, credit card, mortgage or overdraft, they will look at your credit rating.
The better your credit rating, the more competitive the deal you are likely to be offered. With a higher credit rating you are more likely to be treated well by utility companies, too. “These organisations are now lenders and the information they see and share with other providers will determine how they conduct their relationship with you,” says James Jones, a spokesperson for Experian. “This will mean an initial check to see if you are credit worthy, and whether, for example, you should have a prepayment meter fitted and how they should respond to any late payments.”
You can improve your credit rating by making sure you are on the electoral register, trying not to miss any loan, mortgage or utility payments, cancelling any old credit cards that you no longer use, and not making too many applications for credit in a short time period.
You can also check that the information on your credit file is correct by asking one of the credit reference agencies like Experian or Equifax for a copy of your £2 statutory credit reference file.
Last updated: 12 June, 2018
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