In this lesson, you'll learn how you can borrow money.

You'll meet people who are also learning to borrow, and you'll see how to work out what kind of borrowing is right for you.

Key Learnings

  • What you need to think about before you borrow
  • How to apply to borrow money

Read time: 

7 mins

Chapter 1 

What to do before you borrow

Read time: 

3 mins

Aga's borrowing needs

 

Aga's friends are going on holiday next year. They've asked Aga to join them.

Before she can decide how to pay for her trip, she needs to think about all of her options and what borrowing money will cost her long term.

In this lesson, we'll follow Aga's story as she works out what to do. First, there are some questions that she - and you - need to ask and things to think about.

 

Are there other options?

 

Almost everyone panics about buying something important, large or urgent.

Aga should first check if she has enough money saved up already to pay for the holiday. If she doesn't, she should check how long it would take her to save up the money, before deciding to borrow. For example, if she can save up enough in two months, she might wait. If she can't save up enough before her trip, then she might want to look at borrowing.

Aga could also check if there are cheaper flights by looking at comparison sites.

What are you borrowing for?

 

Aga is thinking about borrowing money for a holiday. Many people need to borrow money for unexpected costs or emergencies, such as car repairs or a new boiler. Some people choose to borrow money for a special occasion such as a birthday celebration or a wedding. Another reason to borrow money might be for 'debt consolidation', where you combine all of the money you have borrowed into one place.

Remember

Whatever you borrow money for, it's important to check that you aren't borrowing more than you can afford to pay back. 

How much will it cost?

When you borrow money and there is a cost, it can be tricky to find out how much you need to pay. Most lenders will charge interest, some will charge fees. Not every type of borrowing will have both, but it is useful to know about each of them.

Interest

Interest is a percentage of the amount you borrow, that you must pay on top of the amount you borrow.

For example, if you borrow £1000 and the lender charges 1% interest, you will pay back the lender £1010.

Some lenders won't charge you interest for a certain amount of time (for example, 12 months) as an incentive to use them.

Fees

Some lenders will charge you a fee when you borrow money. This is an 'upfront' fee for using the service.

Other lenders will only charge you if you miss a repayment or if you borrow more than you agreed with them.

Some lenders won't charge you fees for a certain amount of time (for example, the first 12 months you are borrowing).

What is APR?

APR means Annual Percentage Rate. APR is the percentage you will pay on top of the amount you borrow. This number includes the interest and the fees you would pay for the year.

Some lenders use this number as an easy way for you to compare types of borrowing so you can choose which is best for you.

Let's look at some examples:

Credit card A

Credit limit:                     £1,200

Interest rate:                    18.9%

Card fee                            £0

Representative APR       18.9%

You repay                    £1,426.80

Credit card B

Credit limit:                     £1,200

Interest rate:                    18.9%

Card fee                            £150

Representative APR       31.5%

You repay                   £1,578.00

 

Be kind to your mind

Most people want to borrow money because they can't afford, or want to spread the cost of, something important or urgent.

When you can't afford something you need, it can feel upsetting or frightening. Try not to let those emotions cause you to make a wrong decision about borrowing.

If you're not sure about how much money you can borrow, or what type of borrowing is best for you, speak to your bank. They are there to help and can guide you to the support you need.

Chapter 2

Applying to borrow

Read time:

4 mins

How to apply

Aga knows she wants to take out a loan to pay for her holiday. She doesn't know how to borrow money from a lender, so she asks her friend Samira, who recently got a credit card.

Use the arrows to find out how Samira explains to Aga how to apply.

If your application fails

If your application has been refused, it can feel upsetting and scary. Try not to make any decisions whilst you feel that way.

If you apply for a different type of credit too quickly after a refusal, it can make your credit score go down again. Don't feel that you have to borrow money from someone who isn't a bank or financial organisation, or family, if this happens. You need to understand all of your options first.

Aga's application for a loan was refused, so what should she do next?

Find out why

Aga can ask the lender why her application was refused. This will help her to decide if she can still borrow money in a different way.

For example, if she was refused because she couldn't afford the monthly repayments, she could apply to borrow a smaller amount of money over a longer amount of time so that the monthly repayments are more affordable.

You can find out more about being refused credit by visiting the MoneyHelper website.

Check your budget

Aga should check her budget again to see if she has saved up enough money yet to pay for her holiday. She should also check if anything on her budget has changed. For example, have any of her bills gone up or down? Is she now able to save more money?

Aga can also check her credit report to see if she has done everything she can to improve her credit score. She can make sure she's on the electoral register and set up some direct debits.

Explore other options

Aga should look at what other types of borrowing she could use. She was refused for a loan, but would a credit card with a suitable credit limit be better? She might be able to join a credit union with women in a similar situation to her and borrow money that way.

It's important that Aga doesn't just continue to apply for credit – many applications in a short space of time can make lenders think you're desperate and harm your credit score.

Just because Aga was refused one type of credit, it doesn't mean she would be refused for all other types. She could make a list of the pros and cons of each type of borrowing to help her decide what to do next.

How to borrow money: completed!

You've learned what to do if you need to borrow money and how to do this sensibly, while understanding the risks.

Learn with Halifax is committed to providing information in a way that is accessible and useful for our users. This information, however, is not in any way intended to amount to authority or advice on which reliance should be placed. You should seek professional advice as appropriate and required. Any sites, products or services named in this module are just examples of what's available. Halifax a division of Bank of Scotland plc does not endorse the services they provide. The information in this module was last updated on 25th November 2024.