Borrowing
If you are under 18, it is a criminal offence for anyone to send you material inviting you to borrow money or obtain goods or services on credit or hire purchase. However, if you are over 14 but under 18, you can enter into a credit or hire purchase agreement if an adult acts as your guarantor.
You can borrow money at any age, but access to loans may be limited because a lender will not usually be able to take a young person to court if they break the terms of a loan. This is because you cannot usually be legally held to a contract you make when you are under 18.
If you apply for a credit card when you are under 18, you will have your application turned down.
Different ways of borrowing money
Loans, overdrafts and buying on credit are all ways of borrowing. Different methods of borrowing suit different types of people and situations. Whatever type of borrowing you choose, it's important to make sure you'll be able to afford the repayments.
Before deciding to borrow money it's important to work out whether you'll be able to repay it in the future. The Financial Services Authority (FSA) budget calculator (www.moneymadeclear.fsa.gov.uk/tools.aspx?Tool=budget_calculator) will help you check your income against outgoings to see what you would have left at the end of each month to repay borrowings. If you find that your spending exceeds or is close to your income already, think very carefully about whether you really can afford to borrow more.
Also bear in mind that paying back loans and credit cards may become a problem if, for example, interest rates go up or you lose your job. The FSA interactive debt test (www.moneymadeclear.fsa.gov.uk/tools.aspx?Tool=debt_test) will help you check whether you have - or are likely to have - problems with borrowing.
Secured loan/'further advance'
With a secured loan, the lender has the right to force the sale of the asset against which the loan is secured if you fail to keep up the repayments. The most common form of secured loan is called a ‘further advance’ and is made against your home by borrowing extra on your mortgage. (Your mortgage is itself a secured loan.) Because secured loans are less risky for the lender they are usually cheaper than unsecured loans.
Secured loans are mostly suitable for borrowing large amounts of money over the longer term, for example for home improvements.
Unsecured loan
An unsecured loan means the lender relies on your promise to pay it back. They're taking a bigger risk than with a secured loan, so interest rates for unsecured loans tend to be higher. You normally have set payments over an agreed period and penalties may apply if you want to repay the loan early. Unsecured loans are often more expensive and less flexible than secured loans, but suitable if you want a short-term loan (one to five years).
Overdrafts are like a 'safety net' on your current account; they allow you to borrow up to a certain limit when there's no money in your account and can be useful to cover short term cashflow problems. Overdrafts offer more flexible borrowing than taking out a loan because you can repay them when it suits you, but they're not usually suitable for borrowing large amounts over a long period as the interest rate is generally higher than with a personal loan. You need a bank account in order to have an overdraft.
Buying on credit is a form of borrowing. It can include paying for goods or services using credit cards or under some other credit agreement.
You normally take out hire purchase (HP) or 'conditional sale' agreements when you buy cars or furniture. An HP agreement is a debt, and you don't actually own your goods until the debt is paid off. Until then, they belong to the person you bought them from (the creditor).
The Office of Fair Trading had produced a leaflet on making the right choice with HP. To use this file you will need Adobe Acrobat Reader. If you do not have it on your computer, please use our advice page.
By shopping around and negotiating - not just for goods and services but also for financial products such as loans and credit cards - you can make your money go further.
The Financial Services Authority have advice on the types of loan you can have (www.moneymadeclear.fsa.gov.uk/products/loans/loans.html).
FSA information on the types of borrowing (www.moneymadeclear.fsa.gov.uk/products/loans/types_of_borrowing.html)
Compare borrowing costs with the FSA loan calculator (www.moneymadeclear.fsa.gov.uk/tools.aspx?Tool=loan_calculator)