Borrowing money, while at times useful, can present costs and risks.
Before you Borrow
Take time to think before borrowing and consider all options.
- Do I really need the item or service? Is it essential? If it is essential, is there a different option to borrowing (e.g. foodbank, clothes bank, second hand, Freecycle)?
- Do I need to borrow the money or could I raise the money a different way (e.g. access benefit entitlements, wait until pay-day, secure overtime, or garage sale)?
- Can I afford to borrow the money including the repayments, charges and so on?
- How much can I really afford to borrow?
- What type of borrow option will work best for my situation?
- How much will I have to pay back in total (including interest and charges) and by when?’
- What are the risks or charges if things go wrong?
- What is the best deal I can get when comparing lenders or borrowing options?
If you are using borrowing to pay for everyday expenses (e.g. food), contact a free Money & Debt adviser who can help you to look at your budget and other options available to you.
Always check your lender is approved by the Financial Conduct Authority (FCA) before borrowing or paying any fees to ensure it is not a scam. Check here - https://register.fca.org.uk/s/.
Some borrowing options are higher-risk than others (e.g. high-cost lending) and some should ALWAYS be avoided. A range of borrowing options and their risks are outlined below.
Credit Union Loan
Credit Unions support their local communities and people to combat financial exclusion by offering affordable loans. Members pool savings to provide each other with low interest loans, usually much lower than other forms of credit. Credit Union loans do not usually charge hidden or additional fees such as early redemption fees. Credit Unions usually require borrowers to live or work in the local area, so you need to find one relevant to you.
Ulster Federation of Credit Unions
Irish League of Credit Unions
Bank/Building Society Personal Loans
These are are usually a fixed amount (the interest rate you repay will not change), borrowed over a fixed period of time (the term of the loan) and paid back in monthly instalments usually by direct debit. You will be charged a rate of interest and sometimes fees. Secured personal loans means that an asset (usually your home) has been used as security against the loan in case you can’t pay the loan back, so they can be a risky option.
Allow you to buy things or withdraw cash on credit. Interest charged is usually high and there can be handling fees (e.g. for cash withdrawal) making it an expensive way to borrow. However, if you pay off your balance or borrowing in full each month you pay no interest.
A bank may offer an overdraft facility to take more money out of a bank account than is in the account. Interest is paid on the amount owed and you may have to pay an administration or arrangement fee. The interest rate on an overdraft is typically higher than a personal loan and if you go over the agreed limit charges (e.g. fees and additional interest) can be very high.
With this type of credit, you don’t own the item, rather you hire it until all instalments and charges are paid. You cannot sell or dispose of the item without the lenders permission, and may face additional costs if the agreement is terminated (depending on the amount paid).
Are intended as a short-term loan borrowed from a company until your next payday. There is usually a very high interest rate and they often come with very large penalties if a payment is missed, making them very expensive for people. Think about the options listed above before taking a Payday Loan. If you decide to take one be sure to shop around and compare interest rates. Check on the Financial Services Register if the price comparison website is regulated https://fac.org.uk/firms/financial-services-register
Are lenders that offer you money according to the value of the goods that you bring to them. They keep the goods until you repay the loan and interest/fees which is typically very high. If you don’t pay off the loan within the time period the lender can sell your goods to get their money back so it can be risky.
Borrowing from Family or Friends
Can be tempting as no interest is usually paid. However, it can impact on relationships and friendships if the money is not paid back or not paid on time, so consider this carefully.
ALWAYS AVOID illegal lenders such as loan sharks. Unlicensed money lending has increased in NI with the cost of living crisis. Loan sharks charge high interest rates and sometimes use money-lending as a means of control with threats of violence if repayments are not made. If approached by a loan shark, DO NOT BORROW and instead seek FREE money advice to help maximise your income or manage your debts.
If you have borrowed from and/or are being harassed by a loan shark contact the Northern Ireland Trading Standards Service immediately by Phone 0300 123 6262 or E-mail firstname.lastname@example.org. Trading Standards can help you deal with your situation and the loan shark. Not repaying a loan from an unlicensed lender isn't a criminal offence, and in fact, if a lender isn't licensed by the FCA then they have no legal right to recover the debt. For more information about dealing with loan sharks visit https://www.nidirect.gov.uk/articles/dealing-loan-sharks
Choosing Credit (what to borrow)
If you need to borrow money, always consider the best borrowing option for your situation, and always shop around for the best deals and lowest risks. Comparison websites (e.g. Money Supermarket) can help with this, but it is important to understand what to compare.
Annual Percentage Rate (APR)/Interest Rate
APR means the cost of borrowing over the year including fees and charges. However, you need to check which charges are included. Generally, the higher the APR, the more you pay. You also need to check if interest rates are fixed or variable. If they are variable, they could increase over the lifetime of the loan. Interest free deals (e.g. on balance transfers) usually only last a short time before high interest kicks in so use caution. Use a Loan Calculator to work out the full cost of the loan.
Consider additional fees not included in APR e.g. administration fees, arrangement fees, early redemption fees, late payment fees, and balance transfer fees to work out the full cost of borrowing.
The longer you borrow for, the more expensive it is overall. However, increasing the borrowing period can make monthly repayments cheaper and more manageable. You can use a Loan Calculator to show you the difference in overall cost of paying a loan off more quickly.
Secured or Unsecured
If a loan is secured against an asset (e.g. you home), there could be more risks involved if you can’t keep up with payments.
If the borrowing options available to you are high risk or high interest, improving your credit rating can help to access better borrowing options and deals. See our Accessing Better Credit Options guide.