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The best (and worst) ways to borrow money

The best (and worst) ways to borrow money
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There are good and bad ways to borrow money. The best ways come with reasonable interest rates and sometimes even improve your credit score. The worst ways carry high fees and can get you into deeper financial trouble.

Before you sign on the dotted line, make sure you’re taking on good debt that you can afford. 

GOOD: Personal loan

One of the best ways to borrow money is to get a loan from a bank or credit union. Credit unions often offer smaller loans, while banks might be able to lend you as much as £15,000. Because personal loans do not require equity, you’re not putting your car or your home at risk like you would with a secured loan. Plus, personal loans can be repaid over a period of several years so they won’t put too much additional stress on your finances.

Personal loans have an added benefit: they can help improve your credit score, as long as you don’t miss any payments.

BAD: Credit card cash advance

Paying for things you need with your credit card can be good or bad, depending on your card’s interest rate and how soon you can pay off the balance. But taking a cash advance from your credit card is one of the worst ways to borrow money.

Credit card companies charge you a fee for the transaction, which can be a flat amount or up to 5 per cent of the amount you withdraw. Also, there’s no grace period when taking cash out, meaning interest starts accruing immediately. Finally, many credit cards charge a higher interest rate for cash advances than for regular card use.

GOOD: Alternative funding

According to The Money Advice Service, alternative lenders such as Community Development Finance Institutions (CDFIs) are one of the best ways to borrow money if you don’t qualify for a traditional loan. CDFIs are alternative organisations that offer loans to people who don’t qualify for one through mainstream sources. They also work with people with poor credit ratings or those who have no credit history.

Though CDFIs mostly focus on loans for start-ups and small businesses, they also work with individuals in certain circumstances. CDFIs are registered with the Financial Conduct Authority (FCA) and must adhere to a number of regulations that are fair to the consumer.

You can locate CDFIs, small credit unions, and other alternative lenders through Finding Finance.

BAD: Payday loans

Payday loans could be an OK option if you have a real emergency and need quick money. But this is only true if you can pay the loan back by the due date, usually within 20-30 days. Otherwise, you’ll end up paying much more than you borrowed.

The StepChange Debt Charity has a payday loan calculator where you can see how much a payday loan could cost you if you don’t pay it on time. For example, if you borrow £200 for 20 days and pay on time, you will have to pay back £232.

However, if you are 30 days late, you will owe £298.60. After 90 days, the debt will be up to £400. According to StepChange, UK regulations prevent payday lenders charging you more than double your original loan, so a £200 could never cost you more than £400.

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