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Guide to borrowing

Find out about the different ways to borrow, including loans, credit cards, mortgages and purchase agreements. And, understand how to borrow safely.

Most people need to borrow at some point, but it's important that you borrow wisely and sparingly for the sake of your long-term finances.

Delaying all or part of the payment, or paying in instalments, is a type of borrowing. That might be something as little as the cost of buying a jumper from a catalogue, right through to the cost of your home. However, there are some important differences between different types of borrowing.

Secured and unsecured borrowing

Secured borrowing includes things like mortgages and some loans (you should be told if a loan is secured). It tends to be a cheaper option in the long term, but it's not without risks. The amount you borrow is secured against your home, meaning that, if you don't keep up the payments, you risk losing it.

Unsecured borrowing covers things like personal loans, overdrafts and credit cards. They are more expensive debts in the long run, with higher rates of interest, but the debt is not secured against your home.

Types of loan

Mortgage

Mortgages are large secured loans. The amount you can borrow depends on the value of the property and how much you can afford to repay each month based on your income. The loan is secured, but if you can't keep up payments, the lender can take ownership of the property. Find out more about mortgages

Mortgages from NatWest

Bank overdraft

A bank overdraft is unsecured and can be a useful short-term solution if you just need a buffer for occasional use, or for a short period of time. Overdrafts should be used for small emergencies, rather than being seen as an extension to your bank balance.

Find out more about overdrafts and current accounts

Overdrafts from NatWest.

Credit card

Credit cards are unsecured. They can be a handy way to pay for items like TVs, household purchases like furniture, or to book a holiday, if you know you'll have the money to pay the loan off quickly.

Credit cards can be expensive if you keep to a balance and only pay off the minimum. Using a credit card to withdraw cash can also be expensive.

But there are some benefits. Credit cards generally come with insurance that will protect you if a company you buy from goes into liquidation, or an item you buy stops working and the retailer won't honour the warranty.

Find out more about credit cards

Credit cards from NatWest

Personal loan

Personal loans can be secured or unsecured and are generally for anything from 1,000 to 25,000.

If you apply for a personal loan, make sure you know if it's secured or unsecured. If you don't own your home, you will only be offered an unsecured loan.

The longer period you spread repayments over, the lower the monthly payments will be. But be sure to check the interest rate and understand exactly how much you'll be repaying over the course of the loan.

Personal loans from NatWest

Store cards and shop-related borrowing

Store cards and other shop-related borrowing options, like catalogue accounts, are unsecured. These options might seem like an easy way to buy things you want now, and pay for them later, but they usually have very high interest rates so they'll cost you a lot more in the long run.

Hire purchase and finance agreements

Hire purchase and finance agreements are most commonly offered when you're buying a car, appliance or other household items like furniture.

They work in a similar way to a loan, where you agree to pay back a set amount each month until the cost of the goods, plus interest, is paid off. There will usually be a much higher rate of interest than with other types of loan, however, and it may be 'front-loaded,' which means all you pay off initially is the interest, not what you owe on the goods.

Be sure to read the small print, as you may still be liable to pay off the debt even if you take the goods back.

Before you take out a loan

When you agree to any type of borrowing, you're entering into a contract. So it's important you read everything and really understand what you're committing to and what can happen if you don't stick to it.

Understand the interest and APR

When you borrow, you'll be repaying more than the initial amount due to the interest on the loan. The rate you pay will vary according to the type of loan. But when comparing options, always look at the APR (Annual Percentage Rate) as well as the interest rate. This takes into account any admin fees and other charges. On the whole, the lower the APR, the lower your monthly payments will be.

Consider protection

When you take out a loan, you may be offered Payment Protection Insurance, which is designed to cover you if you are suddenly unable to make payments due to a change in your circumstances. It will add to the monthly repayments, so be sure you factor this in and check if you already have sufficient cover, such as income protection through your employer. Check what is and isn’t covered.

A longer-term solution to consider is income protection insurance. This is a wider reaching cover that replaces part of your income if you are unable to work for a long period of time due to illness, injury or disability. Another option could be a new type of short-term income protection insurance. To speak to us about the income protection options we have available visit your local branch.

Beware of charges and small print

Some types of loan can be front-loaded with interest, meaning that when you start repayments, you're only paying off the interest and not reducing the amount owed. So ask up-front before you sign, and make sure you know about any admin fees that may be added to the final payment.

Know your credit score

Your credit score, or rating, relates to your financial health. Every time you apply for any type of credit, the bank or company you're buying from will credit score your application.

This involves checking your credit-worthiness to make sure that you'll be able to repay any money you borrow.

Points are awarded to the information you provide on your application and against information already held on your credit file, which is based on past financial applications and current commitments. Lenders use this information to assess the risk of lending to you, and it influences their decision on:

  • giving you a credit card or loan
  • what credit or overdraft limit to give you
  • what interest rate to charge you

If your score doesn't reach the lender's pass mark, they may do one or more of the following:

  • refuse your application
  • offer to lend you a smaller amount than you applied for
  • charge you a higher rate of interest

Improving your credit score

It's important to understand your credit score and what affects it. Having a good credit history, paying bills on time, not missing payments and not applying for credit regularly will all help give you a good score. Each lender has its own system. But generally these things can improve your score:

  • being in the same job for a long time
  • owning your home
  • having lived at the same address for a while (a year or more)
  • being on the electoral roll

Don't make too many applications. Every time you apply for any type of credit, a score will be placed on your file, regardless of whether you are accepted or you decide to take the credit offered. So, do your research before you apply. Multiple attempts to gain credit in a short space of time can make you seem desperate for money, and unattractive to lenders.

What to do if you're refused credit

Lenders don't go into detail about their scoring systems but should be able to tell you the main reason they have declined to lend you money. You have the right to contact the Credit Agency they used and ask for a copy of your credit file. However there may be a small charge for this.

Information from other sources

Take the Money Advice Service financial Health Check

Take the Money Advice Service Debt Test

Worried about debt? StepChange Debt Charity may be able to help.

Top tips

Stay in control

Planning your finances can help you reduce your borrowing and stay on top of repayments.

Make a budget plan

Think carefully

Understand the details before borrowing. Always look at what can happen if you fall behind on payments.

Keep a clean score

Simply applying for credit affects your score, even if you're successful. Plan your finances ahead and apply carefully.