IMPORTANT FACTS- Types of loan There are lots of different ways you can borrow money which can be useful in different circumstances. The main types are explained in the table below:
| What is it? | What is it for? | Pros | Cons | |
| Bank Overdraft | Borrowing money from bank through your current account Can vary from £200-£2000+ depending on the bank | Short term borrowing or emergencies | – Good for sudden overspends e.g. higher than expected bill | -Have to pay interest and sometimes daily, weekly or monthly fees-Unauthorised overdrafts (going overdrawn without bank’s permission, or exceeding the overdraft limit) is expensive-Transaction fees can be £10-£25-No guarantee – overdrafts can be withdrawn at any time |
| Personal loans | Lump sum of money to be paid off slowly over 1-5 years Tend to be for £5,000-£25,000 | Paying off a large purchase e.g. a car or kitchen. | -Not secured against an asset-14 day cooling off period if you change your mind-Fixed monthly repayments-Can borrow more than on a credit card-Normally have a fixed interest rate-Can consolidate other loans | -High rates of interest, particularly for small amounts-Lower rates of interest with higher loans might encourageadditional borrowing-Older loans (before Feb 2011) have early repayment charges-Advertised APR may only be for a short period of time |
| Credit cards | – Borrow money from bank- Run up a bill to agreed limit& pay it afterwards, usuallyonce a month on a particular payment date. | Paying for goods andservices. | -Protection against fraud- Extra protection for goods/services between £100 and £30,000- Easy way to pay for unexpected expenses- No interest if you pay back in full each month | – Risk of spiralling into debt – Paying bill with DD needs money to avoid going overdrawn.-Hefty interest on borrowed money |
| Payday loans | Short-term loans for small amounts (£50-£80), to be be paid back over one or two months | Designed to tide people over until payday | – Quick and easy even if you have a poor credit history- Money is paid directly into your bank account- Lender cannot extend a loan more than twice unless they freeze their interest and charges- Interest is capped at 0.8% per day of amount borrowed and overall repayment is capped at twice original loan. | – Very expensive, particularly if not paid back within a month.- Late payment fees- Full amount amount plus accrued interest is taken directly by CPA- If it’s not paid back then it may affect ability to get credit in the future- May charge a money transmission fee- May be tempted into further debt by deferral or rollover offers |
| Door stop lenders | May also be called home creditLoans for small sums between £50-£500Lenders come to people’s houses | Very short-term borrowing for emergencies | – Have to be licenced by the Financial Conduct Authority (FCA)- Convenient – money is delivered to house by an agent and they also collect payments- Tend to be no penalties for missing a repayment | – Very expensive for anything more than a few days, as rates can be 1,500% APR- Much more expensive than a bank loan or credit card- Lenders come to the house, which could feel intimidating |
| Debt consolidation loans | Moves all existing loans into a single loan | For dealing with large amounts of debt | – Lower interest rate and lower monthly repayments than individual loans- Simpler – you owe money to a single lender- Could make sense if used as an opportunity to cut spending and get back on track | – Missed payments on a secure debt consolidation loan, could lead to losing a house- Can be high fees for arranging the loan- Extra fees and charges |
| Loan sharks | Illegal lenders who often targetlow income and desperate families | Should be avoided at all costs. | None – loan sharks are illegal, not licensed and dangerous | – Pay far more in interest than through any legal borrowing. One woman who borrowed £500 ended up repaying £88,000.- May be harassed or threatened with violence if you get behind with repayments.- Often pressured into borrowing more money to repay one debt with another.- Offer little or no paperwork and refuse to give information on interest rates or repayment-Increase debt or add additional amounts to it without permission- Take items as security e.g. passports, bank cards or diving licences |