Borrow with your eyes open

The credit crunch and economic downturn has prompted a resurgence in the 3,000 year-old business of pawn broking with many brokers at the top end of the market reporting that business has risen by as much as 25% in the last two months.


The success in the industry is resulting with new players entering the short-term loan market. One of them is Borro, an online service that aims to offer a ‘fast, convenient and responsible solution when traditional sources (credit cards, personal loans and overdrafts) are not available or are already fully utilised’.


The Borro system works in a very similar way to traditional pawn broking as short-term loans are provided through the temporary release of equity from personal assets such as jewellery, watches and so on. Borro lends up to 40% of the value of items pledged and charges a monthly interest rate of 6% (4% or less for loans of £1,000 or more). There are no fees or other charges, but if, at the end of six months, you are unable to repay the loan and interest then items pledged against the loan are sold by Borro to repay the loan and interest, although any surplus will go to you.


However, those likely to use such a service tend to be the most vulnerable who are already encountering financial difficulties. Consequently, there is a high chance that they won’t be able to afford to pay back what they owe within the six month period and therefore lose the item their loan is secured against. So what other borrowing options are available?


I need cash quickly
Payday loans are an increasingly popular form of short-term borrowing and demand has soared by around 55% over the last year.


Typically you can take out a payday loan for amounts ranging from £80-£800 but they are generally used for amounts less than £200. The idea is simple – you borrow a certain amount and then have to repay that amount plus interest by your next payday (a 31 day term). Generally however, interest rates are high – you can usually expect to pay a mark-up of 25% meaning that if you borrow £100 you’ll have to pay back £125.


Payday loans are a useful solution for many as they have no effect on your credit score and can offer a welcome alternative to going overdrawn without permission at a bank where you could face penalties in the region of £90. However, the amount of interest you pay is high and it’s vital you can repay this money on time or you could find yourself on a slippery slope into deeper debt problems.

Many use them because they can’t afford their monthly bills but then find they can’t repay the loan back in full, which means interest charges and another loan the following month to try and make ends meet. You should think carefully about your ability to repay before opting for one of these deals. For more on this subject read our article ‘quick fix comes at a high price’.

If you are confident that you will be able to clear your payday loan, within the allotted time, there are plenty of providers to choose from including PayDay UK, which allows you to borrow between £80 and £750 over 31 days with an instant online decision. Both Debit Card Loans and Payday Express allow you to borrow up to £800 with the same rate of interest over a 31 day term. All the payday loan providers featured in our payday loans section are authorised.

What about longer term borrowing?
Payday loans are popular among borrowers who have poor credit scores, as your credit history isn’t checked so you may be able to access money through a payday loan that you wouldn’t qualify for if you applied for a standard loan or credit card.

They are also popular with those who need access to cash quickly because of an unforeseen cost they’d not budgeted for, such as a broken down boiler or car.

However, if your credit score isn’t too bad and you plan ahead and apply for credit before you need it, you will probably be able to borrow more cheaply.

One option is an overdraft. Generally the rates on overdrafts are high – around 18% for authorised borrowing - but many banks offer an interest-free buffer in the region of £250. If you don’t have an overdraft facility set up on your current account, contact your bank to see if you are eligible for one.

If you are regularly overdrawn and need a large overdraft facility, it may be worth switching your current account to a different provider as not all banks charge excessively high rates.  Alliance & Leicester, for example, offers a 12-month interest-free overdraft on its Premier Direct and Premier current accounts. Once the introductory period is over, you will be charged 50 pence per day up to a maximum of £5 a month, for going overdrawn.

Premier Direct is an online account that pays an annual rate of 8.5% on balances up to £2,500, while the Premier account pays just 1% on balances in credit although, you get £100 if you switch to this product. It also includes free annual European travel insurance.

Another option is a credit card. A number of providers offer interest-free periods. The Halifax One Online Special charges no interest for 10 months on purchases and balance transfers although you will have to pay a 3% fee if you move a debt over from another card. Alternatively, if you are looking to reduce the cost of an existing debt and don’t need a card to spend on, the Virgin credit card offers the longest interest-free period on balance transfers at 15 months. The transfer fee on this product is 2.98%. You should avoid spending on this card however, as the 0% period on purchases lasts only three months – thereafter you will be charged the standard annual rate of 15.9%. Your monthly payments will go towards clearing the transferred balance first, leaving you accruing interest at the higher rate.

Whether you qualify or not for the leading deals, is dependent on your credit rating – so use our credit card Eligibility Checker tool to find deals that you are likely to be accepted for based on your profile.

This also applies to personal loans if you choose an unsecured loan to borrow a larger amount of money than would be available with a payday loan – use our loans Eligibility Checker tool to find deals you are likely to qualify for.

Many people will prefer borrowing with a loan rather than a credit card because it is more structured and requires less self discipline – you know when your debt will be cleared, how much you will have to pay each month and how much it will cost you in total to borrow. With credit cards on the other hand, while you may benefit from lower introductory rates but you can vary the amount you pay off each month and the temptation to spend is always there. So unless you have the self control to clear your debt within the offer period and can resist the spending temptation, a credit card may not offer the best borrowing facility.

If you’re looking for a loan, the leading unsecured rates for borrowers with good credit scores are from yourpersonalloan, Barclaycard and Tesco. The annual rates of interest are 7.6%, 7.8% and 7.9% respectively. If your credit score is less than perfect you will have to pay a significantly higher rate – UCC’s Fair Plan is the leading deal at 17.9%.

If your credit score isn’t great and you’re a homeowner, you may be able to get a lower rate if you opt for a secured loan. A secured loan may also be a better option if you have large debts – in excess of £25,000 as an unsecured loans aren’t usually available for debts of that amount.

Ocean Finance has the leading secured annual rate for those with a good credit rating at 9.5%, while Norton charges 10.5% for anyone with a fair rating.

Think twice
Before jumping into any form of borrowing think carefully about the consequences and particularly about your ability to repay. Consider alternatives too – perhaps a friend or family member would be willing to loan you the cash you need without the risk of using property as security or facing a high rate of interest.

Remember there are solutions – but the key is to find one that doesn’t cause more problems than it solves.

Have your say: Do you already have a loan or credit card? If so, how do you rate the provider? Give feedback on your experience with your loan or credit card provider and help others choose the right product.






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