Should I Borrow Money? A Beginner’s Guide To Responsible Borrowing
Money Pug can help you to borrow the money you need. But borrowing money is always a serious business and should never be undertaken lightly. This guide should help you to decide not only what sort of borrowing is right for you but also whether you should borrow in the first place, and how to borrow responsibly should you decide to do so.
Finances are an important part of everyday life, but unfortunately, too many of us do not have as good a grip on our finances as we should. Budgeting can be difficult and sometimes, there is no alternative but to borrow the money that we need for certain purchases.
In this guide, we will discuss whether you should borrow money (and when it is definitely not a good idea) the reasons for borrowing money, and potential alternatives to doing so, before going on to discuss the different ways to borrow money and how to make the right decisions about what and how to borrow, and from where.
Should I Borrow Money?
Before you commit to borrowing money, it is important to consider whether you really need to borrow to achieve your goals or to meet your specific needs. There are many different sorts of borrowing, undertaken for a whole host of different reasons. You should only borrow money if:
- You cannot save the amount required over a reasonable period of time.
- Your need is pressing or you cannot do without the funds.
- You can afford to repay the amount that you want to borrow within an agreed upon term.
When looking to whether or not you can afford to borrow a given amount, you should remember to take into account not only what the monthly repayments will be, and what interest (APR) will be added to the amount that you owe, but also any fees or charges that might be incurred when taking out the contract, or further down the line if, for example, you might decide to repay the amount sooner than planned.
Remember that failing to keep up your repayments on a loan or credit card, or exceeding the limits of an agreed overdraft, will result in a blot on your credit report and a lower credit score, which will make it much more difficult and expensive to borrow in future.
Borrowing money can be a good idea if you wish to improve your credit score. Building up a credit history by borrowing can help you to get better terms for borrowing in future. For this reason, responsible borrowing can be a good idea. That said, if you have a low credit score, be cautious about borrowing and make sure you are fully aware of the terms of any contract and the amount of interest that you will have to pay. Those with low credit scores borrowing money will often find that they are met with very unfavourable terms, so that is also something to take into consideration.
What Alternatives Are There to Borrowing Money?
- Borrowing money from a bank or another financial institution or lender can often be the most sensible option (as long as you have a genuine need, have entered into the contract with your eyes open, and can afford to keep up repayments). That said, it is important to remember that borrowing money is not always your only option.
- If you find yourself in financial difficulties, you may be able to get help from a charity or may be entitled to benefits of which you were not aware. Do not overlook the possibility that family or friends may be able to help out. Borrowing in desperation due to a lack of cash is rarely, if ever, a good idea and can get you even deeper into difficulty. Consider ways in which you might be able to save money in your everyday life – for example, on food bills, energy requirements or other everyday expenses. Often, you can get access to free advice on budgeting and free financial advice which could help you find a way out of your present difficulties without borrowing beyond your means.
- Often, of course, people look into borrowing for large purchases like homes or vehicles. Before you commit to borrowing large sums, you should always consider whether or not you could save up to either reduce the amount you have to borrow, or to eliminate the need to borrow entirely.
- When considering a mortgage, for example, it is important to weigh up the time it will take to save a larger deposit against the benefit of being able to purchase a new home sooner, but at a higher ongoing monthly cost. Remember to factor in the interest into your calculations. In some cases, you would be better holding off on borrowing for a year or two, for example, in order to save a larger deposit and keep the borrowing (and interest you will have to pay) down.
- When buying a vehicle, or another expensive item, saving should also be considered. Think about how pressing your need actually is. Sometimes waiting and buying outright can be a more sensible option than borrowing. Remember that when you borrow, you will usually pay back much more than the original amount by the end of the term due to the interest that you will pay on the debt. Of course, sometimes, slowly saving up is not an option, at which point you should consider responsible borrowing of one form or another.
What Types of Borrowing Could I Consider?
If you do decide that you need to borrow, there are a number of different types of borrowing to choose from. The type of borrowing that is right for you will depend on:
- What you need/want to buy.
- The amount that you need/want to borrow.
- How quickly you will want to/ be able to repay the debt.
Types of borrowing include:
- Non-Secured Personal Loans
- Secured Personal Loans
- Credit Cards
What is a Mortgage?
A mortgage is a particular type of loan that is taken out in order to buy a home. If you are buying property than most of the time, a mortgage will be the only option available to you – unless, of course, you choose to forgo buying a property and rent instead.
As mentioned above, though mortgages are often an essential form of borrowing, it is important not to borrow more than you can afford to repay. You should also consider carefully when to take out a mortgage, as sometimes, especially for first time buyers, you can get a more favourable rate on borrowing if you wait a while to get a mortgage and save up a larger deposit.
What is a Personal Loan?
A personal loan is an amount of money that is borrowed as a cash lump sum and paid back over a certain time period through regular (usually monthly) instalments. You could borrow money using a loan for almost any purpose. Often, personal loans are used to purchase vehicles, to improve your home, to buy equipment for sports or a hobby, or for a holiday or other luxury expense. Certain loans are specifically to buy certain things – like cars, while other deals offered by lenders are more multi-purpose.
If you apply for a loan and the lender, having checked your credit history, is happy to go ahead and lend you the amount you requested, they will transfer the money directly into your bank account. You will then commit to paying that loan back each month until the balance is paid off.
Personal loans generally allow you to borrow between £1,000 and £25,000, though you can sometimes borrow more or less depending on your specific situation and requirements. Smaller loans will usually require to be repaid over a shorter time period – usually a year or less, while larger loans are usually repaid over a longer time period – usually at least three years and sometimes over as many as 25 years. Most loans are repaid over a period lasting between 1 and 5 years.
Lots of companies and organisations now offer loans in the UK. These include:
- Building Societies
- Credit Unions
- Peer to Peer Lending Websites
- The Government
Before deciding which loan to go with, it is important to determine not only which company or organisation offers the best deal for you but also whether a loan really is your best option. There are often other ways to borrow which may be better for your specific situation.
What are the Pros and Cons of Loans?
- Good for long term borrowing.
- Can take less than 48 hours to arrange.
- Potential to borrow a large sum.
- Loans often offer a fixed rate of interest.
- Some loans require security.
- There are often charges for early repayment.
- Repayments are often less flexible than for other methods of borrowing.
- You need to have a good credit rating to get the best rates.
What is a Credit Card?
A credit card is another way of borrowing money. It can be used in the same way as your debit card to purchase goods and services. Unlike when you use a debit card, however, spending on a credit card does not involve spending money from your current account but rather borrowing the money from the card provider. Every time you spend, the amount will be added to the card’s balance – the total amount that you owe. You will be able to get a credit card with a set spending limit and will be sent a credit card statement each month that you can choose to pay off immediately or gradually over time. There will usually be a set minimum that you will have to pay off each month. If you choose to pay off your credit card later, you will usually be charged interest on the amount that you owe. This is something to bear in mind when deciding whether a credit card in the right option for you.
What Are the Pros and Cons of Credit Cards?
- A credit card allows you to spread the cost of a purchase.
- You get protection on your purchases.
- Some card let you borrow free of charge.
- Some credit cards offer cash back on purchases, rewards or air miles.
- Credit cards, when used responsibly, can help improve your credit history.
- Overspending on a credit card can quickly lead to spiralling debt.
- Steep interest charges can increase the amount you owe.
- Withdrawing cash is usually very expensive.
- There are often fees for late payments or for going over your credit limit.
What is an Overdraft?
Another option when it comes to borrowing money is to use an overdraft. Overdrafts come with most current accounts. They let you borrow money from your bank or building society and keep spending to an agreed limit even after your balance reaches zero. Some overdrafts charge no interest or fees and so you can use them to borrow money for free. These can be the cheapest way to borrow a small amount of money to see you through at the end of the month and make it easier to weather any cash flow problems.
However, it is important to check that your overdraft is free, as some can be very expensive. They may also not be an option if you need to borrow a large amount of money, or want to borrow over a longer term. Banks and building societies can vary considerably when it comes to how large an overdraft you can get. Many offer a set amount like £500 as standard, though overdrafts can range between £10 and thousands of pounds. As well as depending on where you bank, how large an overdraft you can arrange will also depend on your financial situation and credit record.
What are the Pros and Cons of an Overdraft?
- Overdrafts easily allow you to borrow small amounts of money that you can repay quickly.
- Overdrafts are a flexible way to borrow.
- Some banks allow you to borrow for free.
- Arranging an overdraft is quick if you have an existing account.
- You need a good credit rating to borrow on an overdraft.
- There are high fees if you go over your overdraft limit.
- Un-arranged overdrafts and some other overdrafts can be expensive.
Choosing to borrow money is never something to be rushed or undertaken without due care and attention. Think carefully about whether borrowing is the right option for you and if it is, do your homework to make sure that you get the right borrowing option for you. Always be certain that you will be able to repay the amount, and don’t be gouged by high interest payments or fees. If and when you do decide to borrow, always compare offers for mortgages, personal loans or credit cards with Money Pug to make sure you get the very best deal for you.
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