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Borrowing

It’s usually cheaper in the long run to try to save, however, sometimes it is impossible to avoid having to borrow money. If you’re going to borrow make sure the interest rate is as low as possible and you shop around. Once you’ve found a loan deal, use a loan calculator to work out what it’ll cost you.

The most common ways to borrow are as follows:

  • a loan from your bank or building society – often  the cheapest way to borrow money
  • alternatively an overdraft may be cheaper than a loan if you want to borrow for a short period of time. If you’re thinking of taking out an overdraft, make sure you agree with your bank how much you can go overdrawn. Charges for unauthorised overdrafts can be extremely high.
  • credit cards – if you pay your bill in full at the end of the month, you can get free credit for a short period of time with a credit card but make sure you shop around to find the best deals if you plan to use a credit card to borrow for longer periods.

Many people with poor credit history assume they can’t borrow or must pay a high interest rate. This isn’t necessarily true as credit unions and Community Development Finance Institutions (CDFIs) can lend at as little as 1% interest every month.

If you aren't able to borrow from a bank or building society, it is likely that the cheapest place to borrow from is a credit union. These offer low interest rates. They encourage you to save what you can and only borrow what you are able afford. They’re legal, safe and don’t make a profit out of their services. Orbit has agreements in place with several Credit Unions, please contact us for further details.

Find your local Credit Union.

Before you do borrow money, however, you should always consider the following:

Costs

You might have to pay fees to cover arranging the loan or administration costs. These can be hidden in the small print so don’t forget to check. You might be charged if you want to pay off your loan early.

Term

This is the length of time you have to pay back the loan. The longer the term you choose the lower your repayments are likely to be, but the total you have to repay will be higher. Make sure you’ve set yourself a realistic budget so that you can work out how quickly you can pay off the amount you borrow.

Annual percentage rate (APR)

The higher this number is, the more you will pay for your loan. The APR describes the interest and costs of the loan over a year.

Other borrowing options include:

  • a loan from your bank or building society can be the cheapest way to borrow money
  • alternatively an overdraft may be cheaper than a loan if you want to borrow for a short period of time. If you’re thinking of taking out an overdraft, make sure you agree with your bank how much you can go overdrawn. Charges for unauthorised overdrafts can be extremely high.
  • loans and credit cards. Make sure you shop around to find the best deals. 

Avoid payday loans. These might allow you to get money quickly, but paying it back could be a very slow, stressful and expensive process. For more information watch our video below:

Loan sharks are illegal money lenders and should never be approached. If you become aware of a loan shark operating in your area please contact the loan shark units who will investigate. Contact can be made anonymously.

Payday loans

Payday or pay cheque loans are short-term loans that you get in return for showing your pay cheque or proof of your income. These loans usually enable you to get money very quickly  but they’re often extremely expensive: the APR can be as high as 5,500%. Some borrowers who choose this option end up taking out a new loan to cover their debt payments, which can lead to even more problems.

Illegal lenders (loan sharks)

Anyone who lends money without a licence from the Office of Fair Trading (OFT) is breaking the law. You can check with the OFT if a lender has a licence.

Reasons to avoid using a loan shark include:

  • they might use violence or intimidation to get you to repay what you owe
  • their rates will be extremely high and you might find it difficult to keep up with repayments
  • you might be forced to get a second loan to pay off the first, causing your debts to spiral out of control.

Avoid borrowing money from unlicensed lenders and report any that approach you. You can do this through the Stop Loan Sharks website or by calling their helpline on 0300 555 2222. You do not have to give any personal details to report a loan shark.

You can also call this helpline if you’ve already taken out a loan with an unlicensed lender and are having problems or are being threatened. You’re not breaking the law by borrowing from a loan shark and you’re not legally required to pay back the loan.

Home credit (doorstep lenders)

Doorstep lenders will visit you at home to organise a loan and collect repayments. They are convenient but very expensive, though usually cheaper than a pay day loan.

Before borrowing from a doorstep lender:

  • check how much the APR is
  • check that they’re licensed by the Office of Fair Trading . If they’re not then they’re operating as an illegal lender
  • check that you know the penalties for failing to keep up repayments.
Pawnbrokers

To borrow money from a pawnbroker you have to leave your valuable item (the pawn) as security in return for a loan. You’re normally given six months to repay the loan in full, including interest. Your item will be returned once you’ve repaid the loan. If you can’t pay back the money by the agreed date, the pawnbroker may keep or sell your item.

Logbook loans

You may see these types of loans offered on the high street or on the internet. A logbook loan is a loan secured on your vehicle. You’ll be asked to hand over the logbook (vehicle registration document) and sign a document called a bill of sale. This means that the company lending you money becomes the owner of your vehicle. You’re still able to use the vehicle if you meet the loan repayments.

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