A Complete Guide To Borrowing Money

A few weeks ago we looked at how to get out of debt. In this second part of The Motley Fool's GCSE course, we tell you how to get into debt...If you really must!

In the first part of The Motley Fool's GCSE course, you learned how to get out of debt. However, sometimes we need to get into debt.

Borrowing money is not a decision you should make lightly. Each loan you take out decreases the amount of things you can buy in your lifetime. Hugely! This is because more of your future income goes towards paying off debt interest. If you start by saving from the beginning instead, you can buy a lot more over time. If you already have debts, the quicker you're out of debt, the more you'll be able to buy in the future.

As this is a GCSE, I'm particularly keen to help younger readers avoid making the mistakes that millions of older people have made. Many people in their twenties and beyond will tell you that they wished they'd saved more and bought less, because the stuff they bought didn't make them any happier.

Consider this: will you be happier in five years' time when you're still paying debts and debt interest on the loans, credit cards and overdrafts you took out today? Your salary may have gone up, but you still can't afford more because of these repayments.

If you decide that you still want to borrow money, you'll need to do so in the most suitable way for you:

Overdrafts

A bank overdraft is mostly useful for short-term emergency borrowing. However, it is not cheap, as we explained in The Great Overdraft Sting.

Credit cards

Credit cards are a very useful tool if used properly, but there are loads of devious ways in which they rip you off if you're not extremely careful. I'll get to that later. Firstly, take a look at how you can use them to borrow money safely:

For making small or big purchases, read Pay No Interest For A Year* and Pay Off Debts At 3.9% A Year*.

You can transfer credit-card debts to a new credit card to get a better deal. Some cards allow you to transfer existing overdraft debts too. Most cards will also allow you to transfer personal-loan debts, but you should check for early repayment penalties in your personal-loan contract. Read how to choose a card suitable for debt transfers in Put Your Debts On Ice*.

Finally, get cynical, because credit-card providers really do booby-trap their products. Read 12 Ways Your Credit Card Rips You Off!

Personal loans

When it comes to borrowing, I am a big fan of unsecured personal loans, because they are more suitable for undisciplined borrowers than credit cards. Unlike credit cards, it's usually harder to underpay with personal loans, so therefore you pay less interest because you can't let your debt linger for ages. Read about these loans in Six Great Tips For Getting A Personal Loan.

Learn how and when to use secured loans, and heed my warnings in Secured Debt: The Next Big Problem. Remember, these loans are rarely the best option for you!

Student loans

You'll almost certainly want a student loan if you go to university. You can read about them in A Monster Guide To Student Finances.

Mortgages

And finally, the big one. As I said earlier, when you borrow you decrease what you can buy in the future. However, there are exceptions, and your mortgage is the biggest one of those. After perhaps 25 years, you'll own your house outright, which means you'll save a lot more money than someone still paying rent. It's not brain surgery!

For guidance on getting a mortgage, read our free mortgage guide, starting with chapter one, How Much Can You Borrow?

That's it. In the next part of our GCSE course, we move from borrowing to a subject that is eminently more Foolish: saving!

*The tables used in the articles in these links are out-of-date, but the guidance is all still relevant. For up-to-date tables, go to our credit-card comparison centre.