Borrowing money
If we did not sometime borrow money, most of us would never be
able to afford to buy expensive things like a home or a car and
would find it difficult to cover the cost of lots of big items,
such as furniture and electrical goods.
We often hear borrowing talked about as if it is a bad thing,
but, as long as we know why we’re borrowing and how we’re going to
pay it back, it can be useful.
This section explains more about how borrowing
money works.
You can read through this information sheet, or go directly to
the sections you want to read by clicking on these links:
Borrowing money
How borrowing works
- When we borrow money, the chances are that the person or
company that is lending to us will want something in return. Most
of the time, this ‘something’ is interest, which is an extra sum of
money that we pay back on top of the money we originally borrowed.
See Interest
- Secured loans: Some of the time when we borrow money, whoever
it is that has lent us the money wants more than just our word that
we will pay it back. Before they lend us the money, we agree that
if we cannot pay it back, they can have something of ours that they
can then sell to get their money back. This is called secured
lending and an example of a secured loan is a mortgage: if we fail
to pay back the money, our mortgage lender can take our home away
from us and sell it to get the money back.
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Different types of borrowing
There are lots of different ways to borrow money:
- Loans – if we take out a loan, we are usually
borrowing a set amount of money over a certain time
- Mortgages – these are loans that we use to
buy homes. Because we borrow so much money, they can take about 25
years to pay back
- Overdrafts – an overdraft is a sort of loan
facility that banks can let us have on our current account. They
let us take out more money than we have in our account
- Credit - is the word we use to describe
getting something now and paying for it later. There are lots of
different sorts of credit, for example:
- Credit cards, which are plastic cards that we
can use to pay for things instead of cash. The Money Advice
Service website has more information about
how credit cards work (link opens in a new window)
- Hire purchase. In this case, when we buy
something, we usually pay some of the money upfront and the rest in
instalments over a certain period of time.
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Where we borrow from
As well as different ways to borrow money, there are also lots
of different places to borrow money from:
- Banks and building societies provide loans, mortgages,
overdrafts and credit cards
- Other financial companies offer us loans, mortgages and
specialised facilities for things like buying cars
- Credit unions offer loans to their members
- The Student Loans Company, which is owned by the government,
lends money to students to help them pay for higher education
- The Social Fund provides Budgeting
loans to people on various benefits as well as Crisis
Loans
- The alternative credit market, which is made up of things like
pawnbrokers, door-to-door moneylenders and cheque cashers
- Family and friends.
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Borrowing money
The pitfalls of borrowing
- Because of interest, when we borrow money to pay for things,
they usually end up costing us more than they would if we had paid
cash
- If we struggle to pay back the money we borrowed or do not pay
it back in the agreed period, the amount we owe keeps growing. See
Interest
- If we cannot pay back the money we borrowed, we could end up
losing our possessions or our home. See Debt
- Sometimes you can even get penalised for paying back money
early so when you borrow, it’s important to check if there are
charges for early repayment.
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Further information
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Last updated: 13 April 2012
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