Ways to borrow money

Overdrafts

If you like the idea of a safety net on your current account, just need a bit of help with cash flow, or you need some short-term borrowing that you can easily repay within a couple of months or so, you may want to consider using an overdraft facility. This will allow you to take more than your balance from your account, which can then be repaid when your salary or other income is received.

Top tip

• It's always better to ask your bank first before going overdrawn, otherwise you may run the risk of your payments being returned unpaid (or bounced) and incurring charges.

Loans

If you want to make a purchase and prefer to pay the money back over a longer period, then taking out a loan with regular monthly repayments might be more appropriate. This way, you are effectively paying for the item that you have bought as you use it.

Top tip

• Think carefully about how long the loan is going to take to repay. The item you purchase with the loan may need replacing before you have finished paying for it.

Secured or unsecured loans

Loans can be either unsecured or secured. A secured loan is one where you borrow a sum of money and put up something of value as security - usually your home. If you do not keep up the payments, the lender can sell the item used as security to get their money back.

An unsecured loan doesn't require any security to be provided, and is generally available for lower amounts over a shorter term.

Credit cards

Credit cards provide a flexible way to borrow. A credit card provides the option of allowing you to determine how much you would like to spend, up to an agreed credit limit and how long you would like to borrow for. A credit card gives you the option of repaying as much of your monthly balance as you choose, although there is a minimum repayment that you must make within given timescales. If you pay the account in full by the payment due date, on many types of card, you will not be charged any interest. Credit cards may offer a variety of features including promotional offers, cashback and loyalty schemes. Over the longer term, however, credit cards can be expensive. If you only ever make the minimum repayment it can take a long time to clear your balance and it will cost you more in interest. In these cases, a loan is probably a more appropriate product.

Top tips

• If you pay your credit card bill too late and miss the payment due date you will be charged a fee by the credit card company. Avoid the risk by setting up a direct debit to automatically pay either the minimum payment or the full balance.

• Credit cards can also offer better protection for your purchases. Under section 75 of the Consumer Credit Act if goods purchased using a credit card cost more than £100 or less than £30,000 then you can make a claim for your money from the credit card company as well as the retailer. This covers not only insolvency, but issues such as items lost in the post or damaged goods and applies even if you only pay for part of the item on the card - as long as the total value of the goods is £100 - £30,000. The law also specifies that you are protected for the item whether it was purchased in the UK, abroad or on a foreign website - that means you'll be protected if you buy online with your credit card.