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Borrowing

Take the mystery out of borrowing. Explore clear explanations of common financial options and concepts.

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Borrowing can be useful in many situations, from covering an emergency expense to paying for a large purchase. The right borrowing option will depend on what you need, how quickly you need it, and how much it will cost.

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How borrowing works

Borrowing is when you receive money, or access to credit, with the agreement that you will repay it over time. In most cases, you will also pay interest or fees as part of the cost of borrowing.

When you borrow money, a lender or credit provider agrees to give you funds or access to credit based on certain terms. These terms usually include the amount you can borrow, how long you have to repay it, the interest rate, and any fees that apply.

Borrowing can take different forms. Some options give you a lump sum upfront, while others let you draw from a credit limit as needed. Some borrowing options, like loans, are repaid in fixed installments over time, while others are more flexible and allow you to borrow as needed up to an agreed limit.

In either case, the total cost of borrowing will depend on how much you borrow, how long you take to repay it, and the associated costs, such as interest and fees.

Types of borrowing

Borrowing can be grouped in different ways depending on how you access the money and what the lender requires in return. Some of the main types include:

  • Secured borrowing: This is backed by an asset such as a car or home, which the lender can claim if the loan is not repaid.
  • Unsecured borrowing: This does not require collateral and is usually approved based on your credit report, income, and existing debts.
  • Revolving borrowing: This lets you borrow up to a set limit as needed, such as with a credit card or line of credit.
  • Installment borrowing: This gives you a fixed amount upfront and is usually repaid in regular payments over a set period.

Understanding these differences can make it easier to compare borrowing options and decide which option best fits your needs.

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Common ways to borrow money

There are many ways to borrow money, and the right option will depend on the amount you need, how quickly you need it, and how you want to repay it. Some options are designed for larger, longer-term needs, while others are better suited to smaller or shorter-term borrowing or regular spending.

Personal loans

A personal loan usually gives you a lump sum that you repay in regular installments over a set period. These loans can be used for a range of purposes, depending on the lender’s terms.

Lines of credit

A line of credit gives you access to a borrowing limit that you can draw from as needed. You only borrow what you need at the time, which can make it more flexible than a standard installment loan.

Credit cards

Credit cards provide revolving access to credit and are commonly used for purchases, bills, or short-term borrowing. If you carry a balance, interest may be charged, which can increase the cost over time.

Home equity borrowing

Home equity borrowing allows you to use the value built up in your home to access funds. This can include home equity loans or home equity lines of credit (HELOCs), but because your home is used as collateral, there is a risk you could lose your home if you cannot make your repayments.

Cash advances

Cash advance loans and apps can help with very small short-term borrowing needs. They are often used to cover a temporary gap before payday, but fees, tips, or subscription charges can still affect the overall cost.

Buy now, pay later plans

Buy now, pay later plans let you split the cost of a purchase into smaller payments over time. They can be convenient for short-term spending, but it is still important to understand the repayment schedule and any charges that apply.

Borrowing from family or friends

Borrowing from family or friends may be a more informal option, but it can still involve repayment expectations. Even when interest is not charged, it can help to agree on the amount and repayment terms clearly in advance.

Each borrowing option works differently and may suit a different type of need. Understanding the structure, cost, and risks of each one can help you choose the option that best fits your situation.

What does borrowing cost?

The cost of borrowing is not just the amount you receive. In most cases, you will also need to pay interest, and some options may include fees or other charges.

The total cost depends on the Annual Percentage Rate (APR), any upfront or ongoing fees, and how long you take to repay what you borrow. Even two borrowing options for the same amount can cost very different amounts overall.

It’s important to understand these costs when comparing your options.

What is the best way to borrow?

Some of the main things to think about when trying to work out the right borrowing option include:

  • How much you need to borrow: Larger one-off expenses may suit a personal loan, while smaller borrowing needs may suit another option better.
  • How quickly you need the money: Some products may offer faster access to funds than others, but speed can sometimes come with higher costs.
  • How flexible the borrowing needs to be: A line of credit may be more useful if you need to borrow in stages, while a lump-sum loan may work better for a fixed cost.
  • How soon you can repay it: Credit cards or other short-term options may work if the balance can be cleared quickly, while longer repayment needs may suit installment borrowing.
  • What the total cost will be: Interest, fees, and repayment term can all affect whether one option is better than another.
  • Whether borrowing is the best solution at all: If the cost is high, the repayments would strain your budget, or the expense is not essential, it may be worth considering alternatives first.

The best borrowing option is usually the one that fits the purpose, keeps costs manageable, and does not create more financial pressure than you can realistically afford.

Advisor explaining loan details to a customer in an office.

Borrowing responsibly

Borrowing responsibly means taking on debt in a way that fits your financial situation and understanding how you will repay it. This starts with borrowing only what you need and making sure the repayments are affordable before you apply.

It can help to compare the full cost of different borrowing options, including interest, fees, and repayment terms, rather than focusing only on how quickly the money is available. 

Understanding what happens if you miss a payment is also important, as late fees, additional interest, collection activity, or negative credit reporting may increase the cost of borrowing.

Responsible borrowing is about choosing an option that suits the purpose, fits your budget, and does not create more financial pressure than you can realistically manage.