Guide to Borrowing Money - Which Option Is Right For You?

Your guide to borrowing in a way that suits you.

The myth that any kind of borrowing money must be bad is outdated. When well-researched and managed, there are lots of savvy types of borrowing that can help you to achieve your financial goals and even reap some rewards in the process (credit cards, we’re looking at you and those air miles!).

We understand borrowing money can be a confusing landscape to navigate. To help you cut through the noise, we’ve demystified different types of borrowing to explain how they could help you to take the reins of your financial future. From overdrafts to credit cards, personal loans and mortgages, here’s all the information you need to get clued up on how to borrow money like a boss.

Overdrafts – borrowing for everyday spending

What is an overdraft?

Put simply, an overdraft lets you borrow money from the bank through your regular current account when your balance falls below £0. Think of it as a handy, short-term rainy-day fund to keep you afloat until your next payday in the event of any unforeseen costs or emergencies.

Intended for occasional use only, an overdraft can be arranged or unarranged:

• An arranged overdraft is where you agree on terms with your bank in advance. It’s a smart idea to set up as a safety net and you’ll only ever pay interest on what you use.
• An unarranged overdraft is when you spend more money than you have in your account without agreeing terms first.

Depending on who you bank with, you may have to pay high interest charges on an unarranged overdraft and some banks won’t give you the option of an unarranged overdraft.

Who would benefit from using an overdraft?

For those who may need a little extra to manage unexpected bills, budget between paydays or cover an unforeseen expense, an arranged overdraft can be a fantastic financial tool to have in place. Some overdrafts even have an interest-free buffer to help you weather unexpected payments, meaning you’ll only pay interest if you exceed that borrowing limit. You can also set an overdraft limit so you don’t borrow beyond what you can afford and ensure you’re able to pay back what you have borrowed as soon as you can.

How long do you have to pay an overdraft back?

While there’s no strict deadline, you should pay back your overdraft as soon as possible. These products are designed for short-term use rather than long-term borrowing due to their high levels of interest.

Find out more about overdrafts.

Credit cards – borrowing for everyday spending and larger purchases

What is a credit card?

A credit card is a short-term borrowing solution that helps you to spread the cost of every day spending, or larger purchases, and to make buying things online more secure. You can use a credit card to spend up to a set credit limit and pay it back later in instalments when you’re able to. Hello, financial flexibility!

They can also be a brilliant tool to help you build and strengthen your credit score, meaning you’re more likely to be approved for bigger loans and other borrowing (such as mortgages) in the future. Other benefits include purchase protection, enhanced fraud prevention and potential incentives such as cashback and rewards. Depending on the card issuer, these can include air miles, gift cards or free coffees.

How do credit cards work?

To keep your spending in check, a credit card lets you spend up to an agreed amount: your credit limit. This limit is determined by factors such as your income and credit history. Every month, you will receive a credit card statement which will detail your balance (how much you owe), the minimum amount you must pay back and the date by which you need to make a payment. If you pay back your balance in full, you won’t need to pay interest on what you borrowed. However, if you only pay back the minimum amount or less than the full amount, you will be charged interest on what you owe. Late payments or failing to make the minimum payment will affect your credit score and accrue late fees and charges.

Some banks also offer 0% purchase credit cards, where no interest is charged on what you buy for an initial period of time (e.g. 12 months). This is great if you need to book expensive flights, pay for home improvements or cover another large outgoing and need some time to spread the cost of your repayments over a number of months interest-free.

Find out more about credit cards with Virgin Money.

Personal loans – borrowing for bigger spends

What is a personal loan?

If you need to borrow money for a larger purchase, like a new car or even an extension to your home, a personal loan may be perfect for you.

Personal loans allow you to borrow a fixed amount of money, for a fixed term, with a fixed monthly repayment schedule at a fixed rate of interest. All of these factors, as well as the rate of interest, are agreed at the outset and won’t change for the duration of the loan. Their fixed nature means they can be set at affordable rates over achievable, long-term time periods (such as five years) and are easy to navigate as things won’t change. You can have the option of overpaying on your loan repayments, but this often carries an early repayment charge.

How to get a personal loan?

Websites like MoneySuperMarket Link opens in a new window and Compare the Market Link opens in a new window are fantastic resources to help you identify competitive rates and streamline your search. You can then discuss your circumstances with various providers to find the deal you are most comfortable with before committing to such a large amount of borrowing.

You will then need to apply for a personal loan with your chosen provider. They will decide whether you are eligible, based on factors such as your credit rating and income, and approve your application before you can start borrowing money.

Discover Virgin Money personal loans.

Mortgages – borrowing for the biggest things

What is a mortgage?

Buying a house is most likely the biggest investment you’ll ever make – but it’s also one of the best! It’s a huge commitment but one that can be truly life changing for you and your family. In order to buy your dream house or flat, however, you’ll probably need a mortgage.

Mortgages are essentially long-term loans used to help you buy a home and are secured against the property itself. As the buyer, you will pay a deposit toward the property on exchange of contracts and borrow money from a mortgage lender to cover the cost of the rest of the house.

While some lenders offer different options, typical capital repayment mortgage payments are made monthly with included interest. The amount you pay depends entirely on how much you borrow, the length of the mortgage term, the interest rate, the repayment type and any associated fees on the mortgage that you may add to the loan.

Capital repayment mortgages are the most common type of mortgage loan for residential purchases, but interest only mortgages are also available, where you only pay the interest on your loan each month. This means the original loan amount remains unchanged throughout the duration of the mortgage, but you'll need to repay the full loan amount in one lump sum at the end of the term or when you sell the property.

Similarly to personal loans, most mortgages allow you to overpay to pay your loan off quicker, but early repayment charges (ERCs) could apply. These overpayments can be made regularly or as a lump sum, and most lenders will usually have a limit (e.g. 10% of the loan) where you can overpay without incurring ERCs. However, not all lenders and products allow you to make overpayments, so make sure to read the smallprint when searching for your mortgage to find an arrangement that suits you.

Can you borrow more on your mortgage?

Yes, of course, it just depends on your individual circumstances. Additional mortgage borrowing allows you to borrow more money on your existing loan from your current mortgage lender, subject to factors such as balance, loan-to-value (LTV) and income, for example.

This additional borrowing could be used for making home improvements or for a larger, special purchase. This type of borrowing is typically for larger amounts and is most often repaid on a monthly basis over a longer period of time. It’s crucial you are able to comfortably afford your repayments, as this type of borrowing is secured against your home. If you are unable to make your payments, your home may be repossessed.

Start your mortgage journey today.