Borrowing money is something most of us will have to do in our lifetimes.  Unless you have enough money lying around to buy a house or car outright, this guide will be useful to you at some point in your life. You might be buying a new home or flat, paying for university, starting a business, facing unplanned emergency expenses, or simply wanting an occasional extravagance.

The truth is – there are as many different options to borrow as there are reasons  for borrowing money these days. It’s easy to get overwhelmed. In this guide, we will cover everything you need to know about borrowing money from A to Z so you can borrow in a way that’s best for you. 

Background: Building Credit the Right Way

A good credit score is key if you plan to borrow money or make a major purchase in life. A good credit score will give you access to the best interest rates and terms when borrowing money.

Read our ‘Beginners Guide to Building Credit the Right Way’ to get started.

Options For Borrowing Money

  • Big Banks. Weighing your options with the most prominent national banks in the UK is a great place to start. Compare  borrowing options with HSBC, Lloyds Banking Group, Barclays, and Royal Bank of Scotland to start with. If you’ve been a long-time customer with another bank, it can be beneficial to schedule time with the loan officer at your primary bank first. Keep in mind you will need to pass background, credit and affordability checks when borrowing money from big banks. 

As always, don’t get too discouraged if you don’t qualify for any of their loan products – there are other options! Big banks typically have many lending options, giving you a broader look into the type of financial products that are generally offered. 

A few common ways to borrow money at big banks include:

  • Credit Unions. Credit unions are financial cooperative organizations that serve local communities and who run on a ‘not for profit’ basis. Simply put, credit unions are owned and run by their members with the benefit of returning profits to their members in the form of lower interest rates and improved services. It’s important to note that they are regulated by the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) and there is a cap on loan interest rates; 3% a month or 42.6% a year annual percentage rate (APR).

    Credit unions operate in the interests of their members. Credit union advisors are known to work diligently to ensure that their members don’t take out loans they cannot afford. You will also need to have a common bond with the members of the credit union in order to join (eg. working for the same employer, industry, or living in the same area).

Expanding your search to borrow money from a credit union can be beneficial if you have a less than stellar credit history and would like some additional support in the borrowing process.

Credit unions offer similar services to the big banks when it comes to borrowing money:

If you’d like to learn more about credit unions, check out the Association of British Credit Unions.

  • Payday Loans. Chances are you’ve heard of payday loans before. They are short-term loans originally designed to help people pay their immediate expenses until payday.  However, repayment is expected in full with interest plus fees typically by the end of the same month. Some lenders have begun to allow borrowing for longer periods of time with installments. 

There has been much controversy over the predatory nature of payday loans. The high-interest rates they usually carry mean they often become difficult to pay back, and can cause people to fall into a debt trap. 

A payday loan should be avoided if:

  • You intend to use the money to  pay off other loans. 
  • You have already taken out a payday loan. Multiple payday loans can be financially disastrous. 
  • You are not certain that you will be able to pay it back on time in full.
  • You plan to use the balance to buy things you don’t need or can’t afford.
  • Home Equity Loans. Borrowing money against the total value of your home or property enables you to access funds without having to sell your home immediately. A home equity loan is a secured loan, which means that your home is collateral should you fail to pay. If you miss payments or have trouble paying back the loan, lenders can take ownership of your home. 

While many people view borrowing money against their home as a great option, you should closely evaluate all of your options. Give serious thought to the pros and cons associated with each. A secured loan is less risky for the lender, not you. Home equity loans are only available to property owners Renters are not eligible for this type of loan.

  • Borrowing Money From Friends or Family. Borrowing money from friends or family is one of the most common forms of borrowing. A third of Brits would rather use an informal loan from family than a loan company according to research from YouGov in 2019.  However, the process of borrowing should go much further than just a handshake and verbal agreement. Let’s connect the dots on this important form of borrowing.

What You Should Know Before Borrowing Money From Friends & Family

Borrowing money from people you know has two distinct advantages over borrowing from traditional lenders. You’re more likely to get:

  • Flexible repayment periods
  • No (or extremely low) interest rate

Note: it’s a good idea to pay a little bit of interest, as a ‘thank you’ to your friend or family member for their help.

Borrowing money from family and friends can get tricky. Make sure you are borrowing and lending responsibly. You don’t want to damage a relationship beyond repair and this can be easily done when money is involved.  One of the easiest ways to avoid damaging a relationship is to put everything down in writing. 

How to Write a Loan Agreement: Borrowing Money From Friends & Family

If you decide to ask for money from a friend or family member, one of the ways you can put their mind at ease is to draw up a loan agreement to make the loan terms legally binding. Entering into a formal written and enforceable promise to pay gives the friend or loved one some sense of security. It shows you’re serious about your intent to pay them back.  Offering to take this step upfront will likely increase your chances of securing funds.

Here’s what you should do to make the loan legally binding:

  1. Define the terms of the loan including: 
    1. Amount being lent 
    2. Term length
    3. Payment plan detailing how payments will be made, when and how much for
    4. Interest rate
    5. Collateral (if any)
    6. Penalties and process if repayment is not made
  2. Draw up a promissory note (template here)
  3. Have a witness be present when the agreement is signed
  4. Get the signatures notarised
  5. Always make payments using cheques or via online/app bank transfer instead of cash, to maintain records of repayment either on paper or digitally

Lenders should also keep in mind that if interest is tacked onto a personal loan, they must inform HM Revenue and Customs in order to declare it on their taxes.

What is the Cheapest Way to Borrow Money?

The cheapest way to borrow money largely depends on a number of factors including but not limited to:

  • How much money you need
  • Your financial history and credit score 
  • How long you’ll need the money for 
  • When you can start repayments

Below we dive into the most widely available types of loans and their pros and cons, so you can determine which option is right for you. Remember, it is always acceptable to ask for help when trying to make important decisions like this one!

Unsecured personal loan: An unsecured personal loan is a loan for a fixed amount which you repay in installments over a set period of time. This allows you to develop a proper plan and map out how you will make repayments. The borrowing amount for an unsecured loan is usually between £1,000 and £25,000 according to loanswarehouse.

  • Pros: 
    • Unsecured personal loans allow you to borrow money without putting up collateral such as your home or property as security against the loan 
    • Repayment terms are more advantageous for the borrower. You have the opportunity to spread out payments over several months.
  • Cons: 
    • The repayment terms are often shorter
    • The interest rates tend to be higher
    • The best interest rates are typically reserved for those with high credit scores—making this option more difficult to qualify if you have a poor credit score or no credit history at all

Secure personal loan: Secured personal loans provide a way to borrow large sums of money, usually more than £10,000. Secured loans are also called homeowner loans because financial institutions typically use the equity of your home as collateral against your repayments. Many large UK banking institutions do not offer secured loans because of their vested interest in providing mortgages and remortgages. 

  • Pros: 
    • Lenders view secured loans as less risky which is why they normally come with longer loan terms and lower interest rates compared to that of unsecured loans. 
    • You can usually borrow large sums of money, depending on the total value of the property you own.
  • Cons: 
    • Obtaining a secured loan can be complex, so it’s important for you to speak to a qualified broker. Most lenders who offer secured loans in the UK only work with brokers.
    • Collateral is a requirement of a secure loan, which means this isn’t an option for individuals who do not own property. 
    • This type of loan is riskier for the borrower because the lender may start court action to repossess  your home if payments are missed. 
    • Some secure loans also have variable interest rates, so the amount you pay each month could fluctuate, making it more difficult to budget for. 

Credit builder loan: This type of loan is designed for people who want to build their credit score up from scratch or repair a damaged credit score. A credit builder loan looks a bit like an ordinary loan on the face of it. You have a specified amount that you have asked for and you make payments in installments until you reach that amount. Where a credit builder loan differs is that you don’t actually get the full amount you’ve asked to borrow until after you’ve paid the full amount back! A credit builder loan will put all the money you pay in installments into a separate bank account that you can’t access. At the same time, your payments will be reported to Credit Rating Agencies, so it builds your credit score.  Once the loan is paid in full, you receive the money back.

Read, ‘What is a Credit Builder Loan?

  • Pros: 
    •  A perq of a credit builder loan is the ability to make payments towards your savings in installments and the opportunity to build your credit at the same time. 
    • During this process, the lender will report your payments to the three major credit bureaus—helping to improve your credit score.
    •  Assuming you pay your loan and/or membership fee on time every month, you can expect your credit score to change rather quickly, around 3-4 months for many people. 
    • The best part about a credit builder loan is that the lender will return the total balance (sometimes including the interest paid) at the end of the term. 
  • Cons:
    •  In some cases, you will owe the lender interest on the loan and certain lenders will require a fee to open an account.
    • You may be charged fees and have penalties applied if you want to stop payments early
    • Changing the terms of the loan may also reduce the impact on your credit score 
    • The funds provided by a credit builder loan are not typically useful for unnecessary spending. In most cases, they are reserved for building credit and proving a history of on time repayments.

Overdraft: Overdrafts are an extension of credit on your current account. Overdrafts can be both arranged and unarranged. An arranged overdraft is one you’ve agreed on with your bank before you go into it. You’ll have an approved limit and will have agreed to any fees in advance. An unarranged overdraft is one you have not agreed on with your bank before using it. You do not have to withdraw the full amount allowed in your overdraft. You can decide to only use what you need. You go into overdraft (arranged or unarranged) when you withdraw more cash than what is in your account or if an online purchase takes your balance below zero. As of August 2020, bank overdraft charges have changed. Some banks have increased overdraft interest rates to 49.9%, nearly double the average APR of credit cards. We recommend doing research on the fees/interest set by your banking institution before going into overdraft. It’s worth noting that some banks have also gotten rid of the interest free buffers on their accounts.

Read, ‘How do Overdrafts Work?’ and ‘FAQs on Barclays Overdraft Policies’.

  • Pros: 
    • Having an overdraft provides you with the flexibility to quickly use additional funds in an emergency or between paychecks. 
    • You can access the funds immediately.
    •  Interest or charges incurred are only billed on the amount borrowed. 
  • Cons: 
    • Overdrafts allow for smaller borrowing and tend to have higher interest rates compared to personal loans. 
    • If your bank doesn’t offer an arranged overdraft and you become overdrawn, they may freeze your account or charge you an “unpaid transaction fee”.

Pro tip: Portify members get instant alerts when your bank balance falls low to help avoid going into your overdraft. Our app helps members to better plan for upcoming expenses and avoid costly fees.

Credit card: A credit card is a revolving line of credit that you can use to effectively borrow money at any time, up to the credit limit. Credit cards can be unsecured or secured, but unsecured credit cards are more common.

  • Pros: 
    • Credit cards are ideal for quickly borrowing. 
    • They offer the flexibility to be repaid over the course of several months. 
    • As long as you make payments on time it will positively contribute to your credit score. 
  • Cons: 
    • Multiple missed credit card payments and high credit utilisation are just a few mistakes that can be detrimental to your credit score. 
    • These errors will often cost you more money in fees than you might have thought. 
    • While there are numerous credit card options available (even for individuals with bad credit), interest rates and the amount you are approved for will depend on your credit history and also may vary from lender to lender. 

Can You Borrow Money Interest-Free?

Yes, there are options available to borrow money interest-free but many of these options are temporary. This is because interest payments are the main source of revenue for banks or lenders. The most common type would be to use an interest-free loan period with a credit card. An interest-free loan period is a short-term introductory offer tied to some credit card offerings for up to 15 months. Other forms of interest-free borrowing include moving existing debt to a 0% balance transfer card.

More recently PayPal has begun to offer reusable credit lines which include four months (previously six months) of no-interest on purchases over £99—allowing you to spread out the costs of larger online purchases.

How Long Does it Take to Complete a Loan Application?

Most loan applications take around 15 – 60 minutes to complete, depending on the type of documentation you need to provide. Once you get approved for a loan, here’s how long you’ll have to wait to see the funds in your account:

  • Big Bank Loans: Usually funded within two business days for existing customers and two to five days for new customers. Being an existing customer is very helpful because you have already gone through the longer processes including background and credit checks. Keep in mind that traditional banks will generally have higher interest rates than credit unions.
  • Credit Union Loans: Turnaround normally takes one to five business days. Most credit unions in the UK require you to be a member before applying for a loan. Credit unions also have legal limits for their APR, capped at 42.6%. In Northern Ireland it’s capped at 12.6%.
  • Guarantor Loans: Up to two weeks. Funding for guarantor loans is somewhat different, since the turnaround time hinges on how organised the applicant and guarantor are. Additionally, they are one of the only exceptions to approval automation, requiring a real person (called an underwriter) to sift through your financial documents. 

How Long Does it Take to Get Approved for a Loan?

Loan approvals have largely been automated in today’s world. Traditional lenders use advanced technology and algorithms to determine whether you’re a suitable borrower which makes the loan approval process much quicker. Most loans only take a few hours to a few days to get approved but the type of loan and lender will impact approval times. Unsecured loans can be approved in hours, whereas secured loans or mortgage loans take up to a few weeks, since the loan is secured against your asset(s), meaning more time is needed to determine the value of the assets.

Borrowing Money & Your Credit Score: What You Need to Know

In most cases, your ability to borrow money and access funds is closely linked to your credit score. The better your credit score, the more borrowing options you will have. Borrowing money can affect your credit score in a positive or negative way, depending on how you manage the money you’ve borrowed.  So make sure you pay close attention to making payments on time and managing your debt responsibly.

How Borrowing Money Can Help Your Credit Score

  • Payment history: Your payment history is one of the largest factors impacting your credit score. Lenders and credit agencies look at how you’ve managed debt and bills in the past. They will check how often you pay bills on time to understand your trustworthiness.  Borrowing money and making payments on time and in full helps your credit score increase over time.
  • Reducing your credit utilisation ratio: Ensuring you maintain low credit utilisation will help you improve your credit score. Your credit utilisation ratio is a percentage of how much of your available credit you are currently using. Sometimes an effective way to improve your credit score is to ask for an increase to your credit limit without drawing down on the amount. This will improve your credit utilisation ratio. If you are doing this make sure you don’t max out on the new, higher, credit limit. 

How Borrowing Money Can Harm Your Credit Score

  • Causing you to go deeper into debt: Borrowing too much money that you can’t repay and taking out multiple loans means taking on more debt. Missing payments, defaulting on accounts and applying for multiple lines of credit will all impact your credit score negatively. 
  • Recording a hard inquiry (hard credit check) on your credit report: Lenders record your application for credit when you borrow. This is known as a hard inquiry/credit search and it is recorded on your credit report for 6 years. Multiple hard checks in a short space of time signals to lenders that you are in urgent need of credit therefore in financial distress. This will lower your credit score. Avoid applying for multiple loans at any given time.

You Are Not Alone

It’s clear that there is no shortage of choices when it comes to borrowing money. Speaking candidly, it’s easy to become overwhelmed when reviewing the numerous options available. Our advice remains the same, take a deep breath and remember to focus on the long-term. Becoming more financially stable can feel like an insurmountable challenge, but don’t be afraid to ask for help  Most banks and credit unions have an abundance of resources and people available to offer expert financial advice. There are also government resources at your disposal and a number of online financial tools to help you achieve your financial goals.

If you have questions about how to build up your financial safety net and access fair credit by becoming a Portify member, please contact us.

Additional financial resources:


Lauren Robson is the digital communications manager at Portify.
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