Borrowing
What borrowing really means, the main ways to borrow, and the three questions worth asking first.
Most people will borrow money at some point during their lives.
Borrowing means using someone else’s money now and agreeing to repay it later, usually with interest.
People borrow money for many different reasons, from buying a home to covering an unexpected expense. Borrowing can be a useful financial tool, but because it usually comes at a cost, it’s important to understand how it works before deciding whether it’s the right option.
If you’re not familiar with why lenders charge interest or how interest rates are set, it’s worth reading the Interest article first.
Common ways to borrow money
There are many different borrowing products available. Although they all involve borrowing money, they are designed for different situations.
| Type of borrowing | Typically used for | Key points |
|---|---|---|
| Mortgage | Buying a home | Usually the cheapest way to borrow because your home acts as security, but your home could be repossessed if you don’t keep up repayments. |
| Personal loan | Large planned purchases | Fixed repayments make budgeting easier, but you’re committed to repaying the loan over the agreed term. |
| Credit card | Everyday spending or short-term borrowing | Flexible and convenient, but interest can be very high if you don’t repay the balance in full. |
| Overdraft | Temporary shortfalls in your current account | Useful for occasional emergencies, but can become expensive if used regularly. |
| Buy Now, Pay Later | Spreading the cost of purchases | Often interest-free if repaid on time, but it’s still borrowing and can encourage overspending. |
| Car finance | Buying a vehicle | Lets you spread the cost of a car over time. Compare deals carefully, as interest rates and terms can vary significantly. |
- Typically used for
- Buying a home
- Key points
- Usually the cheapest way to borrow because your home acts as security, but your home could be repossessed if you don’t keep up repayments.
- Typically used for
- Large planned purchases
- Key points
- Fixed repayments make budgeting easier, but you’re committed to repaying the loan over the agreed term.
- Typically used for
- Everyday spending or short-term borrowing
- Key points
- Flexible and convenient, but interest can be very high if you don’t repay the balance in full.
- Typically used for
- Temporary shortfalls in your current account
- Key points
- Useful for occasional emergencies, but can become expensive if used regularly.
- Typically used for
- Spreading the cost of purchases
- Key points
- Often interest-free if repaid on time, but it’s still borrowing and can encourage overspending.
- Typically used for
- Buying a vehicle
- Key points
- Lets you spread the cost of a car over time. Compare deals carefully, as interest rates and terms can vary significantly.
The same purchase could often be financed in several different ways. The right option depends on the cost, flexibility and risks involved, so it’s worth comparing your options before you borrow. Small differences in interest rates, fees and repayment terms can add up to hundreds or even thousands of pounds over time.
Borrowing isn’t good or bad
Borrowing is simply a financial tool. Whether it’s the right decision depends on your circumstances.
Before borrowing money, it’s worth asking yourself three questions:
- Purpose — Why am I borrowing?
- Cost — How much will it cost me overall?
- Affordability — Can I comfortably afford the repayments?
There isn’t one borrowing product that’s best for everyone. The right choice depends on what you’re borrowing for, how much it costs and whether you can comfortably afford the repayments.
Key takeaways
- Borrowing means using someone else’s money and repaying it later, usually with interest.
- Different borrowing products are designed for different situations.
- Borrowing isn’t automatically good or bad — it depends on the purpose, cost and affordability.
- Comparing different borrowing options can save you a significant amount of money over time.
- The right borrowing product is the one that’s best for your circumstances.