Borrowing sensibly

Even people who are really careful with money may need to borrow some extra cash from time to time.

Whether you want to buy a car, get some work done on your house, or take a holiday, borrowing money can be really useful if you need to get hold of some extra money.

Borrowing money comes in many shapes and sizes - overdrafts, mortgages, store cards, credit cards and personal loans are all types of ways to borrow money. Some come with a structured plan to pay them back, while others are more relaxed - but the thing they all have in common is they need to be paid back, often with interest.

When choosing how to borrow money, the trick is to match your reason for borrowing to the right kind of credit. There are three key things to consider when you look at any type of credit:

1. The APR (Annual Percentage Rate)
The APR includes the interest rate plus any annual or set-up fees associated with the money you've borrowed, giving you the total annual charge you'll have to pay for your credit. It doesn't include additional charges such as fees for early or late repayment.

APRs vary very widely - from single figures of 2-5% for mortgages, to 25% or more for some credit cards and store cards. Short-term "payday loans" often carry APRs of 300% or more.

2. The amount of the monthly repayment
When you're thinking about how much you can afford to pay back every month, don't stretch yourself too thin. Factor in unexpected or one-off expenses that might crop up, such as your car MOT or your boiler breaking down, and remember you need money for non-essentials too.

3. The total amount you'll pay back
When thinking how much you can afford to repay, don't just be swayed by the lowest monthly payments: look at the amount you'll have to repay in total and over how long.

The longer you borrow the money for, the more interest you'll pay. If two loans have the same APR but one is over three years and one over five years, the five-year loan is likely to end up costing you more even if the monthly repayments are lower.

The importance of borrowing sensibly

If you don't keep up your repayments on money you've borrowed, it can affect your credit rating. This could make it difficult to borrow money in the future, even if you're financially secure at the time. Being financially linked with someone with a bad credit rating can affect your rating too.

Different lenders use credit ratings in different ways, so it's worth trying another lender if you're turned down by the first - but be aware that too many credit checks in a short period of time can also have a negative effect on your score.

Checking your credit rating

Please be aware your request for credit will be registered on your credit file. The final decision (accept/decline) on your application for credit is not recorded with credit reference agencies. Please be advised too many credit checks in a short period of time may have a negative impact on your credit score and could reduce the chances of you being accepted by a different lender.

If any of the information about you is incorrect, you can ask the agency to change it. Credit Reference Agencies don't decide if you can borrow money: their customers are the lenders, so they want information that's as accurate as possible.

For more information on how credit ratings work, read our guide to managing your credit score.

  1. Work out carefully just how much you need to borrow and how you'll pay it back - don't be tempted to round up your income.

  2. Try to minimise the total amount you'll repay over the life of the loan - this often means choosing a shorter loan period with higher regular payments.

  3. Make sure you can afford regular loan repayments with a bit to spare - missing a payment could affect your future credit rating.

If you have trouble making a repayment - or think you might have trouble in future - contact your lender as soon as possible.

Credit check services
Make sure there are no errors or mistakes on your credit history that could affect what you can borrow by asking for your credit report from:

Free debt help and advice
To get anonymous advice on becoming debt-free contact StepChange Debt Charity:

Disclaimer: TSB is not responsible for the content of external websites.

Borrowing money: the options

An overdraft on your bank account is a simple way of borrowing money to make ends meet for a short period - for example, until you get paid at the end of the month. It's a good short-term solution, but if you find your overdraft is creeping up every month, it's likely that you're spending more than you earn and you need to make some changes to your budget.

Some overdrafts are interest free up to a certain amount, but many lenders will charge you interest or a fee when you use them. If you think you need an overdraft, agree it with your bank in advance so you can avoid being charged for going overdrawn without agreement.

Credit cards are a flexible form of borrowing money. You get credit up to an agreed limit to spend, and you choose how much you pay off every month above a certain minimum amount. Many - but not all - come with an interest free period on purchases; if you pay off your balance in full during the interest-free period - up to 56 days on some cards - you don't have to pay any interest on the purchases you've made.

If you're not paying your balance off in full every month, you could transfer your balance to a credit card with a lower interest rate - but watch out for balance transfer fees. You might also want to look into whether a personal loan, which usually has lower interest rates than credit cards, would be cheaper for you in the long run. A personal loan can be handy if you have debts on several credit cards and want to consolidate your borrowing into one single monthly repayment.

It's easy to miss payments on credit cards. To make sure you're not charged late payment fees, set up a direct debit for the minimum repayment amount. To be free of your debt faster, it's wise to pay as much off each month as you can afford, rather than just the minimum.

Personal loans are a good way to borrow the sort of money that you can't just pay off in a few months - if you're buying a new car, for example - or to combine various debts into one easy payment.

Personal loans offer a structured repayment scheme so you'll be able to budget for each month.

Depending on how much you borrow, loans can be suitable for financing larger purchases, such as a car. They are also suitable for debt consolidation.

A smaller loan allows you to repay a fixed amount over a set period of time rather than using alternative borrowing such as overdrafts and credit cards.

For most people, a mortgage is the only way to buy property. It's a type of personal loan that usually lasts for 25 years.

The loan is secured against your home: this means if you're unable to pay it back, the mortgage company has the right to repossess your home.

A store card is like a credit card for a particular shop and we're often encouraged to take one out when we're paying at the till. They usually come with the promise of special offers or discounts on purchases, both that day and in the future, which can be very tempting if it's one of your favourite shops.

However, store cards often have a very high APR compared to overdrafts or credit cards, so they can be an expensive way of borrowing. If you're offered one, make sure you ask about the APR and don't feel pressured to sign up there and then.

If you can afford to buy your items outright and the discount is just too tempting, one option is take the card out, get the discount, pay the balance off straight away - then cancel the store card.

In a hire purchase scheme you pay a deposit for an expensive item such as a car and then "hire" it from the seller with regular payments. When your payments add up to the cost of the item, plus interest, you become the owner.

The APR on a hire purchase scheme is often higher than that for a personal loan. The other main difference is that with hire purchase, you don't own the item you're buying until you make the last payment.