5 different ways to borrow money
Everyone needs to borrow money at some point in their life, but most people do not understand the proper way to borrow money when they really need it. Often, people will use the wrong source to borrow money, causing them to incur undue fees and stress. Below is a list of five different ways that people borrow money, including the proper time to use that particular source.
1. Traditional Bank Loan
A bank loan is one of the oldest forms of lending and is usually the first avenue that a person explores when they need money. Bank loans are a great source for money fast, but most traditional banks only loan to people with good to perfect credit. Also, banks usually like to loan larger amounts of money, so getting a loan for £300 or less can be troublesome and even costly. It is best to use this avenue only for larger amounts and if the borrower has great credit.
2. Payday Loan
A payday loan is a sharp contrast from the traditional bank loan, as it is made specifically to people who have had credit problems in the past and the loans are usually less than £600. These types of loans should be a last resort because of the interest rate that they carry. Often times, the interest rate on these loans are 200 to 300 per cent, making them easily the most expensive loan type of them all.
3. Credit Card Advance
Not to be confused with a payday loan, a credit card advance is where you get money directly from your credit card. Most credit card companies do charge a bit higher rate of interest when a person utilises this method to get money, but it is usually just a few percentage points higher. This method can be good for a small, short-term loan since it is easy to get and the borrower can get any amount that is needed.
4. Peer to Peer Lending
Peer to peer lending or P2P lending is a non-traditional form of lending growing in popularity in the UK where people whom are unrelated lend money without using a bank. In essence, it is asking a stranger for money on trust alone, since collateral is often not required depending on the P2P lending company chosen.
P2P lending companies vary in what services they offer and is growing in popularity in the UK with nineteen P2P companies now in operation throughout the UK. There are some new companies that specialise in specific lending for investments for example, property. Peer to peer lending company Folk 2 Folk only deal with lending money for property acquisition. They require the sum of borrowing is more than £25,000 and the property against which they’re borrowing is not for a home they own i.e. it’s for residential buy to let, holiday homes, business commercial or industrial premises, farms and agricultural land.
5. Family and Friends
The perfect scenario is when the borrower has a family member willing to help out and lend the money. Loan terms will need to be agreed including an amount, an interest rate if applicable, the term, repayment type, repayment frequency. But careful thought is needed with this method and whether the borrower can afford to repay the money and can cope with what might happen if you they can’t afford to pay it back. Great option if they can.
Final note
Whatever method a person chooses to borrow money will ultimately depend on their situation, but it is important to remember that borrowing money should only be done as a last resort. Borrowing money is expensive and takes time to repay, no matter what a person's credit situation is. Before borrowing, a person should make sure they really need the money and only borrow what they really need in order to keep their finances in check.