Types of credit
There are several different ways to borrow money, so here's a quick overview.
Overdraft
Your bank allows you to temporarily take extra money out of your current account. If you do this without asking the bank first, they often hit you with extra charges. You are usually expected to pay this money back quickly, and the interest charges can be very expensive.
Credit card/store card
Again, another relatively expensive way to borrow money. You get a card to give to shopkeepers, and the card provider sends you a monthly bill, where you can clear all or some of the balance, or make the minimum payment. Useful for going on holiday with, and many credit cards also provide short-term insurance for your purchases.
Unsecured loan
Useful if you need to raise a fairly large sum of money. You have to shop around for the best rates, and be absolutely certain that you can afford the monthly repayments. If you don't pay up, you can be taken to court, or they might send the debt collectors around. The newer flexible loans may sound like a great idea, but watch out, you could end up paying more interest.
H-P
Hire-purchase agreements (H-P) mean that you're partly paying off a loan, and partly renting the item. They can take a very long time to pay off, and are often extremely poor value for money. You can end up paying much more than the actual purchase price. Sometimes offered on musical equipment or cars.
Secured loan
Your personal property is the 'security' for this type of loan. Although you may get a good rate of interest, if you can't keep up the payments, your property can be repossessed by whomever you owe the money to. A mortgage is a common example of a secured loan, where you can end up homeless if you default on the repayments.
Pawnbroking
You give your jewellery or other possessions to the pawnbroker, and they lend you a small amount of money for a few days. You then have to pay the money back to retrieve your goods; otherwise the pawnbroker gets to keep the items.
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