There are many different ways to borrow money, each of which is better suited to a different purpose. Any form of borrowing has its risks, so it pays to make sure the type of borrowing you choose is right for your needs.
No type of debt is always ‘easier’ to pay back than another – it depends on what’s right for you, in your financial situation. Some types of debt can be repaid (to an extent) at a rate that suits you, but the longer it takes, the more interest it’ll probably cost you. Other debts come with a strict repayment plan that you’ll have to commit to.
Overdrafts are one of the most common types of debt, as a lot of current accounts provide them. They can be a useful ‘safety net’ in the event of overspending – so if you have any unexpected costs to deal with, you’re less likely to face penalty charges, even if you aren’t aware you’ve overspent.
Overdrafts are also very flexible – in general, you can repay the debt as slowly or as quickly as you like.
However, the interest rates can be quite high, meaning the debt can grow quickly if you don’t repay it in good time.
Credit cards effectively allow you to spend money you don’t have yet, and pay it back at a later date. Because you use them in much the same way as you would a debit card, credit cards are widely considered one of the most convenient forms of borrowing.
Credit cards often come with a number of perks – 0% interest on purchases and/or balance transfers, for example, or cashback on your spending.
Like overdrafts, they are also fairly flexible in terms of repayments: you will only be required to make a minimum monthly repayment, usually a small percentage of the balance. But, like overdrafts, they can charge a high rate of interest which can mean there are better ways of borrowing money for a long time – and that it’s important to make more than the minimum repayment whenever possible. Having said that, there are low-rate credit cards that charge much lower interest rates.
Personal loans can (but don’t always) have lower interest rates than other forms of debt. They also have strict repayment criteria: repayments will be set out evenly over a number of months (usually up to 84 months, or seven years, for unsecured personal loans).
This means you must be able to commit to regular monthly payments with a personal loan, but many people like knowing exactly when the debt will be paid off.
Payday loans have received a lot of negative press in recent years, but they can actually serve a useful purpose for people who simply need a ‘quick fix’ until payday – especially those without access to more traditional ways of borrowing, whose only alternative might be failing to keep up with their commitments.
A typical payday loan might charge 25%, which technically means it has a very high Annual Percentage Rate (APR). But the short repayment period means the APR isn’t particularly relevant – as the loan isn’t designed to be repaid over a year.
However, a payday loan could end up costing a lot more than you expected if you don’t repay it when you should. As such, you should only take out a payday loan if you are sure you will be able to pay it back in time.
This is a guest article by Melanie Taylor, an expert finance writer covering all aspects of personal debt, with over 15 years experience. http://www.debtadvisorycentre.ie