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Understanding loans and credit
Working out what you need and what you can afford
The information in this guide was last updated on 26/02/2014
If you’re borrowing from your bank or building society, there are plenty of options available.
These can be an expensive way of borrowing as they often have higher interest rates than loans.
You can often find attractive introductory offers – 0% on purchases for 12 months, for example. If you can pay the balance off in full during that time it could be cheaper than a loan, and they may also offer other benefits such as free travel insurance or purchase protection.
If you have existing debt you may be able to transfer it to a credit card – again you may find introductory offers like 0% on balance transfers which may make it cheaper to pay off your debts.
There may be a fee for transferring your balance, so factor this into your decision.
If you have an arranged overdraft facility on your current account, you could use it instead of a loan. This type of borrowing used to be relatively cheap, but today it’s often comparable to a loan so check to see what sort of overdraft fees apply or what the APR on your overdraft is.
Look out for standard overdraft fees too: a recurring monthly fee for using your overdraft could tip you over your arranged limit and cause more fees, eventually affecting your credit rating if you miss payments.
They can be useful for short-term borrowing, but if you use it as a long-term loan it could get more expensive, so make sure you know exactly how long it will take you to pay it off. And don’t go above your arranged overdraft limit, or you could find that it gets expensive very fast.
Our Borrowing guide provides an easy, step-by-step guide to the different borrowing options available.
If you have a flexible mortgage, you could borrow more money on top of your mortgage. If for example your mortgage is currently for 65% of your home’s value, you could top it up to 85% to raise the money. However, the mortgage may be over a significantly longer period so you could end up paying back more overall.
Borrowing more using your mortgage can often mean lower interest rates than unsecured loans. But remember, your monthly repayments will increase, so make sure you can afford to pay it back otherwise you could risk losing your home.
You don’t need to own your own home or have an overdraft facility to get access to credit. Your bank or building society could also offer you an unsecured personal loan.
From a lender’s point of view an unsecured loan is more risky than a mortgage, which is secured against your home – so a personal loan will usually have a higher interest rate.
You’ll usually have a fixed repayment schedule – often by Direct Debit or standing order – for the life of the loan.
Next: Borrowing from other companies