There are a variety of different ways to borrow money, among the most common of which are personal loans and authorised overdrafts. Personal loans are suitable for people that are looking to borrow a large amount of money over a long period. Overdrafts are a short-term solution using your current account and will charge less interest if you pay the charges on time. This guide will compare loans and overdrafts to help you see which one you are better suited for, and also look at alternative solutions to your borrowing needs.
A loan is an agreement with a lender to borrow money for a set amount of time. They are set up so you have a fixed repayment schedule, usually monthly. Loans will often be given with a certain percentage of interest, meaning that you will end up paying more money back than you initially borrowed. They tend to be longer term than an overdraft and for larger sums of money. Loans can be ‘secured’ or ‘unsecured’. A secured loan means you use an asset such as your house as insurance for the bank in case you can’t pay it back. An unsecured loan means you don’t have to put anything as insurance but you will have to have a good credit history so the lender can trust giving the money to you.
An overdraft is a way of borrowing money through your bank using your current account. It will be limited and you will have to pay it back into the account within a certain time frame. Overdrafts typically have interest although there are certain cases where banks will give you a fee and interest free overdraft for a certain period of time. For instance, a student account will normally have a fee-free overdraft during and just after your studies. Generally, you have to request an overdraft although it may be given to you automatically when you open your bank account.
The most common alternative people use is a credit card. Many credit card companies will offer deals such as 0% interest for a certain amount of borrowing for up to two years. If you were to get a 0% money transfer card you can move money into your current account and pay no interest if you pay it off in the time provided. Credit cards also provide more security if you are using the money to travel abroad.
The key disadvantage with a credit card is that the best deals are often reserved for those with a good to excellent credit history. If you have a poor record of paying back lenders, or are a young adult without much borrowing history, you are unlikely to get the sort of deals that make credit cards a more effective way of borrowing than a loan or overdraft.
Find out which loans you could be eligible to take out, without affecting your credit score