Debt is something that all of us need to rely on from time to time. You may never have anything more than a mortgage or you may be taking full advantage of all the options for loans and credit cards out there. Whatever the debt that you need – or choose – just make sure that you’re using the right kind for your purposes.
The mortgage is the most obvious debt choice for home buying, in particular, because there are few other types of lenders that will advance such a significant sum. Mortgages are secured debts, which means that they are a loan which is taken out and ‘secured’ on an asset – in this case, the property. If you don’t keep up the repayments on the mortgage then the lender has the right to repossess the property and sell it to repay the debt. There are a few additional options to taking out a mortgage if you’re looking to buy a home – such as the government’s Help to Buy scheme, which can reduce the level of personal savings you need to get a mortgage – but most of us who want to buy property these days need a mortgage to do it. Mortgages come in several different types but the main differences are fixed rate (the interest remains the same for a set period) and variable rate (the interest you pay will change).
If you’re looking for debt for the short term then the last thing that you want is to be tied into a loan with a longer-term that is difficult to get out of. While some lenders will offer an easy early repayment, there are often fees to pay for this, so sometimes it’s better to simply opt for short-term debt in the first place. Payday loans are a simple way of borrowing money for a period of around a month (i.e. until your next payday). Interest rates may be a little higher than for a longer-term loan but the time over which you will pay it is limited. Remember to look out for payday loans where you don’t pay any fees to the arranger or lender to keep costs down.
Short-term debt is not a great solution for everyone, particularly if you want to spread out the costs of cash that you’re borrowing. This is where an installment loan comes in really handy as you can choose a repayment period that works for you, with your budget. If you choose a longer period then you will pay more interest but you’ll be able to keep those monthly payments under control. Choose a shorter timeframe and your monthly repayments will be higher but you’ll be clear of the debt sooner. This is a great finance type if you’re borrowing a slightly larger amount and you’re working with a tight monthly budget. Most installment loans will also give you an early repayment option although some lenders may charge for this.
Yes, credit cards are often vilified as the biggest causes of debt issues in the UK but they can be very useful too. If you’re looking for a flexible type of debt that you can spend as you need to and then make a range of repayments that you can increase or reduce at any time then they are incredibly useful. Make the minimum repayment each month or pay off the full balance. Remember that you’ll pay interest on whatever is left sitting on the card and most credit card companies will charge you late payment fees if you miss payments. When you’re choosing a credit card there are a couple of different options – obviously, go for the lowest interest you can find but work out whether you need this on balance transfers (money you’ll move from one credit card to another) or purchases (fresh spending). Many credit cards now offer cashback for money spent using them or you may be able to get air miles or shopping vouchers instead.
For anyone who struggles to get finance – whether as a result of problems in the past or having never had any kind of credit – the guarantor loan is a great, easy option. A guarantor – someone you know and trust –provides an assurance to the lender that they will guarantee your repayments. So, if you can’t make the repayments the guarantor steps in to do it for you. This type of finance will suit someone who needs a little help in establishing lender trust.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley