Most of us need to borrow money at some point in our lives. Using the right type of credit in the best way can help you deal with unexpected expenses, such as buying a new fridge or washing machine. Find out what to consider first, to make sure you make the right decision.
What’s in this guide
Deciding whether to borrow money
There are some important questions you need to ask yourself before you borrow money. For example, can you wait until you have enough money without borrowing? And could you afford to pay it back if you did borrow the money.
If you’re struggling financially, first make sure you’re claiming all the benefits you’re entitled to and if there are grants or rebates you might qualify for.
Also, see if there are other ways to cut back on your costs, for example by switching energy, phone or internet provider.
If you tend to be impulsive when buying things, try giving yourself a cooling off period of at least two days. When you’ve had a chance to think about it, you might change your mind.
If you’re facing higher living costs, find out about extra sources of income and support in our section Help with the cost of living.
If you decide to borrow money
If you definitely want, or need to borrow money, there are some important factors to consider.
How much can you afford to repay?
It’s important to work out how much you can afford to repay each month, as this will affect which borrowing option is best for you.
Make sure you’re realistic about how much you could pay if, for example, your mortgage or rent went up, you had to spend more on things like energy bills, or your pay was cut.
Choosing the right type of credit
It’s important to make sure you choose the right type of credit or loan for your situation. Or you could find yourself paying more than you need to.
When you’ve worked out what type of credit suits you, shop around and compare deals. It’s important to look at:
how much you’ll repay in total
any penalties for missed or late payments, or fees if you pay it back early
the cost per week or month, and whether this might vary.
Find out more about the costs of borrowing, including working out a repayment plan and deciding how much to borrow, in our section on Managing credit well.
Beware high-cost credit
If you have a poor credit score, you might be tempted to use a payday loan company. Before signing up for a payday loan or any other type of high-cost borrowing, make sure you’ve explored all possible alternatives.
Look out for loan sharks
Loan sharks often use online channels like social media to try and lend to people. This kind of lending is illegal and it could cost you a lot more than you think.
Find out more about loan sharks and how to spot them.
Minimum payments
The minimum payment is the lowest amount you have to pay every month to avoid a penalty.
The amount of the minimum payment is usually based on a percentage of what you owe, so it decreases every month as your balance reduces.
This means that it will take longer for you to pay off what you owe if you only make minimum payments, and it will cost you more.
