Borrowing and credit basics

Most of us will need to borrow money at some point in our lives, whether it’s for a student loan, a car, or to pay for a first home. Find out about the range of borrowing products available to people aged 18 and over, and explain how to use them best.

Borrowing - products available from age 18

Most forms of borrowing charge interest, which the lender must show as an Annual Percentage Rate (APR).

This enables you to compare the cost of different products.

Below are some of the most common forms of borrowing. Roughly, the lowest APR products are at the top and the highest are at the bottom.

  • Personal loan – This is usually a fixed amount, say £1,000, borrowed over an agreed period of time. You repay the loan in monthly instalments until you have paid it in full at the end of the period. This is one of the cheapest forms of borrowing.
  • Overdraft – Your bank account provider allows you to take out more money from your account than you have in it. This is supposed to be a very short-term form of borrowing, as the next time money (income) is paid into your account it will reduce or even clear the overdraft. Some bank account providers offer interest-free overdrafts. Be aware that if you go overdrawn without the bank’s permission, the charges might be very high.
  • Credit card – Your credit card provider lends you money to buy things on a credit card. At the end of each month you receive a statement of your borrowing. You can choose to pay off the full balance on the card (i.e. the total of what you have spent), or as little as 5% of the balance. If you choose not to pay the whole balance, you’ll be charged interest on the balance left on the card. This is then added to your statement for the end of the next month. If you only ever pay off 5% of the balance of a credit card it will take far longer and cost far more to repay.
  • Credit unions – These are small financial organisations set up by their members to support the local community. They offer small loans of typically £3,000 or less and are generally far cheaper than payday loans. By law the maximum interest rate a credit union can charge its members is 3% a month or 42.6% a year APR (the cap in Northern Ireland is 1% a month).
  • Store cards – These work in a very similar way to credit cards. The main difference is that you can only use them in stores that belong to the same group. They’re not as flexible as credit cards. They tend to be more expensive because they usually have a higher APR.
  • Payday loans – These are very short-term loans, meant to provide you with money until your next payday. They have very high APRs and heavy penalties for missed repayments. You should always look at cheaper forms of borrowing before you consider a payday loan.

When should you borrow?

Some people say that debt can be classed as good debt or bad debt.

Good debt – any borrowing that enables you to make money or improve your prospects in the long term, such as a student loan, is classed as good debt, as long as you can manage the repayments.

Bad debt – any borrowing that provides no return at all, such as borrowing to fund luxury items or expensive trips.

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