We outline some of the most popular options for raising around £20K
What would you do if you had the extra cash?
If you need to raise money (we took £20,000 as an example) for projects such as a home improvement, or to purchase a car, for debt consolidation, a wedding or the holiday of a lifetime, there are main ways you can go about it. Depending on your personal circumstances, different options will be more appropriate for you. For instance, the best solution for someone with bad credit may not be the same for a person with a great credit record.
Let’s take a look at the different solutions that could be available to you:
If you’re fortunate enough to have easily accessible savings, dipping into your cash may be the best option. After all, you will not need to pay any interest or fees on a loan, nor will you have to make monthly repayments until the loan has been repaid. With interest rates being so low for savers at the moment, what you earn on your balance is unlikely to be anywhere near the interest you would pay on a loan.
Yet, even if you have funds available, you may still want to consider a loan. It will no-doubt have taken you time to save up this amount of money and if you leave it in a savings account it can provide you with a ‘cash cushion’ to use in an emergency. If you spend it you’ll no longer benefit from having this protection.
Family and Friends
Perhaps you could borrow the money from a friend or family member, but borrowing a large amount could test your relationship to breaking point if repaying the money suddenly became an issue. However, borrowing money from friends or family is likely to be cheaper and more flexible than a loan from any financial institution.
It is possible to raise £20,000 using credit cards. However, withdrawing anywhere near £20,000 on credit cards is likely to make the lenders concerned. Credit cards are usually designed for making purchases, not cash withdrawals and they have a higher interest rate for when you take cash out rather than buy goods or pay for services using the card. Credit cards are simply not suited to long-term borrowing and if you merely make the minimum repayment each month the balance will take an incredible amount of time to clear.
Although a loan (personal or secured) would be a more suitable option in this case, credit cards do have their place. They provide a flexible revolving credit line; you can borrow and pay back and re-borrow as often as you like up to an agreed spend limit.
The benefit of using a credit card is that you have the flexibility to increase and reduce your spending without having to apply and be approved for credit each time that you make a large purchase.
Also, credit cards can protect your interests by providing extra legislative protection if a product you purchase is faulty or the workmanship is shoddy. In fact, section 75 of the Consumer Credit Act says that you gain added protection on any purchase you make using a credit card that costs from £100 to £30,000.
Many credit cards offer 0% interest cards to attract new customers with a ‘teaser’ rate that usually lasts for a short, fixed period. Be aware though that a 0% interest rate does not last forever. Typical rates outside an interest-free period are between 15% and 30%. This can end up being particularly painful for those who get into the habit of just paying the minimum amount off their credit card balance each month.
Finally, be aware of your own behaviour with credit cards because of the pre-agreed limits and the lack of a fixed-term to repay. It’s very easy to spend money you don’t really need to spend without any real plan as to how you’ll ultimately pay it back.
Quick and relatively simple to arrange, an unsecured loan may be a great option for raising £20,000. Fees are likely to be low and the interest rate competitive. However, there can be some drawbacks.
Most lenders restrict the term of any loan, typically to 5 years, occasionally 7. Over such a short term, the repayments can be large if you are borrowing £20,000. You need to be confident that you can afford the repayments (and demonstrate this to the lender) before borrowing this way.
As an unsecured loan is not tied to any physical asset such as your house or car, the lender doesn’t have any “insurance” should you fail to make repayments. As such, it may be harder to get accepted for an unsecured loan, or the rate may be higher than with some other forms of finance. This is particularly true for a large amount of money such as £20,000. A loan of this size may be difficult to find unless you have an excellent credit rating.
Personal loan (sometimes known as an unsecured loan)
Quick and relatively simple to arrange, a personal loan may be a great option for raising £20,000. After all, depending on your circumstances, Loan.co.uk arrange personal loans of up to £35,000. Fees are likely to be relatively low and the interest rate will also usually be lower than offered by credit cards.
Most lenders restrict the term of any loan, typically to five years and occasionally to as long as seven. Over such a short term, the repayments can be large if you’re borrowing £20,000. As with any loan, you need to be confident that you can afford the repayments (and demonstrate this to the lender) before borrowing.
As an unsecured loan is not tied to any physical asset such as your house or car, the lender doesn’t have any ‘insurance’ should you fail to make repayments. As such, it may be harder to get accepted for an unsecured loan, or the rate may be higher than with some other forms of finance. This is particularly true for a relatively large amount of money such as £20,000. A loan of this size may be difficult to find unless you have an excellent credit rating and credit history.
Further advance on your mortgage
If you’re a homeowner and already have a mortgage, a further advance may be a sensible option for this type of borrowing. A further advance is when you approach your existing mortgage lender for more money on top of the loan you already have.
In this example you could ask for another £20,000. If the lender is prepared to lend you the money it may be at the same rate as the rest of your mortgage and repaid over the remaining term of your main mortgage. Alternatively, the advance may be at a different rate and term. The benefit of a further advance that the rate of interest is likely to be low and because the loan will be secured on your home, it can be repaid over a long period, keeping the repayments down.
Please note that there may be fees and charges to pay up-front to cover valuations or legal fees as well as the lenders costs of arranging the loan.
Remortgaging means moving your outstanding mortgage amount from one provider to another, in order to get the best deal. If you have ’equity’ in your property (the difference between it’s value and the loans secured against it) you may be able to borrow the extra £20,000 and move your total mortgage balance to a new mortgage lender. The benefit of raising £20,000 this way is that a remortgage will often attract the lowest rate of interest as the loan is secured against property. This means the risk to the lender is fairly low.
Also, the money can be taken over a longer term so the monthly payments relative to an unsecured loan can be lower.
The disadvantages of a remortgage will depend upon your circumstances. It can take a long time to complete a remortgage as it will involve carrying out a valuation, legal search, and collecting various documents from you’ll need to sign. So, if you’re in a hurry to raise funds this may not be the best route to take. Also, be aware that there may be up-front fees to pay to the lender, to solicitors and to whoever values your property.
Finally, make sure you’re aware and have factored in any fees payable to your current mortgage lender for settling your current mortgage balance early and switching it to another lender.
Second mortgage (second charge mortgage)
A second mortgage (sometimes known as a homeowner loan or secured loan) is a personal loan secured on your property.
The benefits of a second mortgage include the fact that you can often borrow larger sums than you can with an unsecured loan and at a lower rate of interest. This means that repayments may be relatively low.
Unlike with a standard mortgage, if you want to repay early or make regular additional repayments, you can usually do so without significant penalties, although this will depend on the lender.
Whilst there will be fees to pay, second mortgages are often used as an alternative to a remortgage or further advance as there are no upfront fees payable. Alternatively, where the borrower already has a competitive interest rate or is tied to their current mortgage product, a second mortgage will enable increased borrowing without raising the cost of the original loan. However, exactly as with your first mortgage, should you continually fail to make the repayments on a second mortgage, the lender can begin action to repossess your home.
This is just an overview of the main types of credit on offer. Depending on your circumstances you may only have a few of these options open to you, or perhaps other routes will be available. Remember to take the time to research the options available to you, in order to get a financial solution that matches your borrowing needs and circumstances.