There may be a time in your life that, for whatever reason, you need to borrow some money. The key is, to make sure that it isn't going to cost more than you bargained for in interest or penalty charges.
Say you needed to borrow £1000. Your washing machine or car has broken and you need to get it fixed quickly – or there's an unexpected bill that's come through.
Firstly, if you can, the best thing you can do is pay this through savings. Having an emergency fund means you aren't paying any interest at all. We would always recommend trying to put aside a bit of money every month when possible.
But if you don't have the money to hand and it really is something important you have to cover (holidays and upgrading your wardrobe doesn't count!) then some ways could be more suitable than others.
Comparing the costs of borrowing
Note that these are three of the most common forms of borrowing – there are others. Our guide on different types of credit could help you pinpoint the best for your circumstances.
1. Interest free credit card for balance transfers and new purchases for first 15 months*
Average Interest rate (representative APR): 0% on a transfer value of £1,000 (plus a transfer fee, typically equal to between 2% and 3% of the balance)
Average APR of 17.7% beyond the 15-month introductory interest-free period.
Monthly repayment: £66.67**
** assumes that the loan is repaid at the end of the 15-month promotional period.
Total amount repayable: £1,030 (£1,000 original loan + £30 one-off transfer fee based on 3%)
This could be good for spreading the cost of borrowing if you can transfer the remaining balance at the end of the promotional period to a new 0% interest free deal.
Although you won't have to pay any interest on the amount you transfer/spend during the introductory period, you will still need to pay a minimum monthly payment (normally 1%-2.5% of the balance) – failure to do so could result in a late payment fee (typically £12) and you may no longer be eligible for the interest-free deal.
You also need to have a good credit rating to be accepted to the best deals.
2. Unsecured personal loan over two years
Average Interest rate (representative APR): 18.6%
Monthly repayment: £50.00
Total amount repayable:£1,189 (£1,000 borrowed + £189 interest)
3. A typical store card paid back over two years
Average Interest rate (representative APR): 30%
Monthly repayment: £55.91
Total amount repayable:£1,342 (£1,000 borrowed + £342 interest)
Unless you know you can pay off the balance every month try to avoid store card debt if you can. This is an expensive way to get credit. Typically their interest rates are far higher than credit cards.
What should you consider when borrowing money?
Always ask yourself these questions before you borrow – wherever you're borrowing the money from.
- Will borrowing this money improve my finances in the long run?
- Have I shopped around to get the best deal?
- Am I borrowing this money as cheaply as possible?
- Will I be able to cope should interest rates rise in the future?
- Will I comfortably be able to afford the monthly repayments?
- Do I understand all the terms and conditions associated with borrowing this money?
- Do I understand the risks and what could happen if things go wrong?
If you answer 'no' to any of these questions, then borrowing money could be considered 'bad' debt.
Defining 'bad' and 'good' debt can help differentiate between borrowing money that could help you in the long-run and borrowing which could put you in a worse position than before.
This article is provided by the Money Advice Service.