Beat the Credit Cards

There is nothing wrong at all with using a credit card for a short term consumer loan. In fact, they have many benefits over paying upfront for an item, particularly if you are not purchasing in person - perhaps over the internet, for example. A typical reason that you might want to use a credit card is because of the protection it affords you with a purchase. If the goods don't turn up, then you can turn to your credit card company as well as the supplier in order to seek a resolution. However, credit cards are not suitable sources of finance in many cases. Unless you are immediately able to pay off the credit card bill when it arrives at the end of the month, you can get into spiralling interest charges. Therefore, you should only use them if you know what your income will be in three or four weeks' time. Secondly, credit cards are not ideal for big ticket items, such as car purchases, where you want to be repaying the loan over several months or even years. However, there are other sources of credit that you might like to explore, instead.

Payday Loans

So-called payday loans are for short term borrowing only. Like credit cards, they usually charge relatively high interest rates for even modest amounts of borrowing. Although both are convenient sources of credit, you must be able to pay back almost immediately in order to avoid very high costs. Like doorstep lenders or loan sharks, for many types of borrowing need, they are really not very suitable at all.

Credit Unions

This is a borrowing source that many people overlook. Credit unions tend to be based in a certain locality, but they are sometimes more associated with a particular group of people, rather than a location. For instance, some credit unions are available to people who work for a certain organisation, or who belong to the same faith group. Unlike banks, credit unions offer self-help. In order to borrow money from one you must have already joined the union and to have been a saver. When a member of the credit union wants to borrow, they may do so and usually with favourable interest terms. Some credit unions are able to offer loans to their members of up to ten years, which is very handy if you have a limited income and therefore your ability to repay is only with relatively low instalments. If you want to join a credit union, because you may want to access a loan from one in the future, the best place to find one is via the Association of British Credit Unions, or ABCUL, or the Scottish League of Credit Unions.

Personal Loans

This type of credit is a financial product offered by the financial services industry. In the majority of cases they are offered by retail banks, but other companies can provide them as well. Some personal loans have a fixed interest rate - so you know exactly how much you will be repaying over the term of the loan in each instalment, assuming that you don't miss any payments. These types of loan are also sometimes offered with a variable interest rate which can go up and down, usually according to the prevailing economic conditions and the rate that is set by the Bank of England. Borrowers using personal loans will be offered a percentage rate which expresses the amount that the lender will be charging for their loan. The advertised rate is a typical example for the product, but people with low credit ratings can expect for this figure to go up if the lender deems them to be a potential risk. These sorts of loan can be arranged over several months or even a few years and are typically used for items like cars or home refurbishment projects so that the cost of purchasing can be spread out. Sometimes personal loans are secured under an asset, such as a home, so you put this at risk if you default on the loan. Never accept the first loan that is offered to you. It is essential to see if you can get a better loan rate elsewhere. Remember that you pay for a loan so you should be just as savvy with checking out the market as you would buying any other service or product. You can find companies offering loans on The Investing Site's Personal Finance section here.

Credit Brokers

A helpful way of comparing lots of the borrowing options available to you is with a credit broker. Remember that comparing typical loan rates may not help you to judge between lenders, depending on your credit history. A credit broker will take your details, including what you want the loan for and how much you want to borrow. Registered credit brokers should be authorised by the Financial Conduct Authority, so check this and avoid any that seem bogus. Remember that, although a broker can shop around for you and obtain a favourable loan, they will charge for this service. Therefore, it is better to do the donkey work yourself and save yourself pounds.

Resources

ABCUL
Scottish League of Credit Unions
Find Credit Unions
AdviceGuide.org.uk Debt