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Credit cards, loans and arranged overdrafts: borrowing options explained

Borrowing money can be a daunting prospect, not least during periods of economic uncertainty.

If you think borrowing could be right for you at this time, start by asking yourself these questions:

  • Why do you need to borrow? – what will you use the money for?
  • How much do you need? – try to work out an exact amount if you can, whether it’s for a one-off cost, or to cover expenses over a longer period
  • How much can you afford to repay each month? – work this out based on your estimated budget for as far as you can plan ahead 
  • How long do you need to borrow for? – based on how much you need and what you can afford to repay, will you be borrowing for a set, or indefinite, period?

Your borrowing options

Once you’ve answered these questions, you’ll be in a better position to decide which way of borrowing would be most cost effective. Keep in mind, you’ll need to pass eligibility checks to be approved for any of the products below. 

Arranged overdrafts

How do they work?

Arranged overdrafts let you continue spending money from your current account when your balance reaches £0, or below. You can typically borrow a certain amount in this way interest free. But once you pass that amount, you’ll be charged interest.

If you have an existing account with an arranged overdraft, your interest-free amount may have temporarily increased recently.

Up to, and including, 29 August, you won’t be charged interest on the first £500 you borrow on an arranged overdraft on these HSBC UK accounts: 

  • Bank Account 
  • Bank Account Pay Monthly 
  • Current Account 
  • Advance Bank Account

This is a temporary measure to help customers who are in financial difficulty due to the coronavirus outbreak. 

During this period, you’ll be charged a temporary rate of 19.9% on any amount you’re overdrawn beyond £500 on those accounts. The normal rate of interest for overdraft borrowing is 39.9% EAR (variable). The normal amount you can borrow without being charged interest is £25.

Explore more: Coronavirus: overdraft support

What are they suitable for?

An arranged overdraft is there to help if you occasionally go over budget. For example, you could dip into your overdraft to cover your costs until you get paid next.

Watch out for...

It’s possible to become over-reliant on an arranged overdraft and use it to cover more than occasional costs. 

Standard interest rates may be higher than on loans and credit cards, so they can be an expensive way to borrow.

You can compare our overdrafts with other ways of borrowing by looking at the APR. APR is the cost of borrowing over a year and helps you compare the costs with other credit products.
Account Standard interest-free overdraft amount Representative examples (based on an assumed arranged overdraft of £1,200)

HSBC Bank Account

HSBC Bank Account Pay Monthly

HSBC Current Account (offsale)

HSBC Advance Bank Account

£25

Representative rate of 38.9% APR variable

Based upon: 0% EAR variable on the first £25 and £39.9% on anything above that.

You can compare our overdrafts with other ways of borrowing by looking at the APR. APR is the cost of borrowing over a year and helps you compare the costs with other credit products.
Account

HSBC Bank Account

HSBC Bank Account Pay Monthly

HSBC Current Account (offsale)

HSBC Advance Bank Account

Standard interest-free overdraft amount £25
Representative examples (based on an assumed arranged overdraft of £1,200)

Representative rate of 38.9% APR variable

Based upon: 0% EAR variable on the first £25 and £39.9% on anything above that.

Credit cards

How do they work?

You can use a credit card to buy things and pay for them at a later date. If you owe money, you have to make at least a minimum payment – which is usually a percentage of what you owe – each month. 

If you don’t repay the amount you owe in full each month, you’ll typically be charged interest.

You’ll have a credit limit, which means you can spend as much as you need on the card up to that amount.

What are they suitable for?

Credit cards can help you spread the cost of regular, or one-off, purchases. They also provide protection if those purchases go wrong, such as goods being faulty or flights being cancelled. 

And by keeping up with repayments, you can use them to improve your credit rating

If you don’t have an emergency fund, credit cards can also provide back-up to cover unexpected costs.

The specific benefits vary according to the type of credit card. For example, some credit cards let you earn points for everyday spending, which you can redeem elsewhere. 

Other types, such as balance transfer and 0% purchase credit cards, offer interest-free periods. These can provide some breathing space on payments, if you use them in the right way.

Watch out for...

The amount you owe – money you’ve spent on the card, plus interest – can mount up if you’re not careful. Try to pay back as much as you can each month, ideally all you owe. The more you pay back, the less interest you’ll be charged. 

Avoid late fees by setting up a Direct Debit to cover at least the minimum payment each month. 

If you use a credit card with an interest-free offer, either on balance transfers or purchases, have a plan for when that offer ends, so you can try to avoid being charged interest.

Loans

How do they work?

A loan is where you borrow a set amount of money for an agreed amount of time. You pay back the full amount – usually in monthly instalments – plus interest. For most fixed-term loans, the rate of interest is also fixed at the outset and won’t change for the duration of the loan.

The rate of interest is typically lower than for overdrafts, or credit cards.

What are they suitable for?

Loans can allow you to spread the cost of a big purchase. They’re commonly used for buying a car and home improvements, for example. 

They can also be used to consolidate multiple debts into one. With a single monthly repayment and interest rate, this can make debts easier to manage.

Watch out for...

It’s really important you can comfortably afford to keep up with your repayments. If you miss a loan repayment, it could impact your credit rating. And if you end up not being able to repay the loan, you could face a county court judgement or bankruptcy. 

If you’re applying for a loan to consolidate other debts, it's important to consider not just the interest rate and monthly repayments, but also the term of the new loan compared to the remaining term of your existing loans or debts. 

Spreading your payments over a longer term means you could end up paying more overall than under your existing arrangements, even if the interest rate on the new loan has a lower rate.

Be aware of loans with high interest rates. For example, payday loans can offer quick access to cash, but you could end up paying back far more than you borrowed. This could make it harder to get out of debt in the long run.

Reasons to borrow comparison

The table below shows some of the reasons to borrow, possible suitable products and what to consider.
Reason to borrow Example Possible suitable products Considerations
Short-term expenses Buying groceries the day before payday
  • Arranged overdraft
  • Credit card
  • If possible, avoid borrowing to cover everyday costs.

 

  • You’ll be charged interest if you go beyond the interest-free amount on an arranged overdraft.

 

  • You’ll be charged interest on a credit card if you don’t repay the balance in full, except for during an introductory interest-free period.
Big one-off costs Buying a car
  • Loan
  • Credit card
  • A fixed-rate loan comes with a clear monthly repayment plan over an agreed time period; but you should be sure you can afford the monthly repayments.
  • A credit card would typically be more expensive, unless you can repay the debt within an interest-free period.
Emergency or back-up funds Repairing damage to your home that isn't covered by insurance
  • Arranged overdraft
  • Credit card
  • You may be charged interest for using an arranged overdraft or credit card, so ideally you’d use savings, if available.
Consolidate debt Merging multiple debts
  • Loan
  • This could make your debts easier to manage and, potentially, less expensive.
  • But you could end up extending your loan term and paying more in interest.
The table below shows some of the reasons to borrow, possible suitable products and what to consider.
Reason to borrow Short-term expenses
Example Buying groceries the day before payday
Possible suitable products
  • Arranged overdraft
  • Credit card
Considerations
  • If possible, avoid borrowing to cover everyday costs.

 

  • You’ll be charged interest if you go beyond the interest-free amount on an arranged overdraft.

 

  • You’ll be charged interest on a credit card if you don’t repay the balance in full, except for during an introductory interest-free period.
Reason to borrow Big one-off costs
Example Buying a car
Possible suitable products
  • Loan
  • Credit card
Considerations
  • A fixed-rate loan comes with a clear monthly repayment plan over an agreed time period; but you should be sure you can afford the monthly repayments.
  • A credit card would typically be more expensive, unless you can repay the debt within an interest-free period.
Reason to borrow Emergency or back-up funds
Example Repairing damage to your home that isn't covered by insurance
Possible suitable products
  • Arranged overdraft
  • Credit card
Considerations
  • You may be charged interest for using an arranged overdraft or credit card, so ideally you’d use savings, if available.
Reason to borrow Consolidate debt
Example Merging multiple debts
Possible suitable products
  • Loan
Considerations
  • This could make your debts easier to manage and, potentially, less expensive.
  • But you could end up extending your loan term and paying more in interest.
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