Borrowing sensibly - the basics

The information in this guide was last updated on 26/02/2014

It can be difficult to decide whether to borrow money and if you do, which type of loan to choose. It’s also important to borrow sensibly to make sure you don’t find yourself in a difficult situation further down the line. As there are lots of ways to borrow money, (from loans to overdrafts to credit cards) it's important to do your research to see which option is best for you.

Do you need to borrow?

Before you borrow, make sure it’s the right decision for you. Do you really need to borrow or could you wait until you’ve saved enough money instead? If you’re borrowing to buy an appliance, for example, you should consider how long this will last. You don’t necessarily want to be paying back money you borrowed for something that you no longer use.

How much will it cost?

It’s important you calculate the real cost of borrowing money. Usually, you’ll pay back more than the actual amount you borrowed because companies make their money by charging interest. This is a percentage of the money you borrow added to the total that you need to pay back.  

Key terms

  • Credit - A sum of money that is made available for you to borrow
  • Interest - The amount of money that is charged on money borrowed
  • Capital - The amount of money you have actually borrowed, or still owe (not including interest or other charges)
  • Annual Percentage rate (APR) - This is the interest rate you would pay over a year and helps you to compare the ‘cost’ of borrowing between lenders
  • Representative example - This is the APR that at least 51% of customers are expected to be charged