You can’t always afford to pay for the things you want outright. A home improvement, new car or holiday could all stretch to hundreds or thousands of pounds – and about 40 per cent of people have less than £500 in savings.
So, when a big ticket purchase comes along, what can you do? It’s important to weigh up your options and see which is the best deal for you.
Here are the options that you can typically turn to:
Personal loan: With this option, you apply to a lender to get a sum, which is normally several thousand pounds. The lender will need to approve your application and will do this, in part at least, by looking at your credit rating. This is usually paid back over a couple of years at an agreed interest rate. This form of finance allows you to sign up to a clear contract in which you know how much you’ll pay back each month and in total. You can use a loan calculator to be sure about the amount you’ll pay.
Payday loans: Slightly different from personal loans, payday loans are intended to tide you over until your wages come into your account. They are typically given for small amounts and carry a very high-interest rate because they are intended to be paid back very quickly.
Overdraft: If you spend more money than you actually have in your bank account then you’ll dip into your overdraft. You need to have permission from the bank to be able to do this, but most banks will allow you a limited amount of money by way of overdraft and some won’t charge you for using this. It’s important to check with your bank and you can talk to them and ask to extend this if you are finding that your current agreed limit is insufficient. This should be seen as a short term option – perhaps when you’re awaiting a payday – and you shouldn’t just treat your overdraft as ‘extra money’ in your account.
Credit card: This little plastic friend can get you out of a hole and allow you to buy something you cannot afford outright. These will come with a credit limit – the maximum you can spend on the card – and might carry interest and charges if you don’t pay the money back in full by a certain date. Many lenders will offer introductory interest-free offers, which makes these attractive, short term forms of lending.
Store cards: These products are similar to credit cards – but are linked to one store or chain of stores. Store cards might offer rewards for your loyalty – such as cashback or money off vouchers – but they might also carry a higher interest rate than credit cards.
Credit unions: These are smaller co-operatives, aiming to ‘do good’ for the community by lending to those in need. They tend to offer smaller amounts – £3,000 or lower – and can only charge a maximum of 3% a month interest.
Peer-to-peer lending: This has become popular in recent years as a new way to access finance. It involves individuals providing finance for lenders through websites that are set up purely to match one to the other. They are able to get a better interest rate than they would in a savings account, while the borrower typically pays less than they would for getting a personal loan. There is, however, less protection for both parties than dealing with a bank or building society.