We all borrow money now and again. Many would not live where they do if not. It is normal, and is one of the oldest practices that humans have been partaking in. It is nothing to be embarrassed about. however, debt can be dangerous and harmful. It can lead to stress, financial difficulties and more. So before you think of taking on debt, think about your options. Here are some questions to answer before borrowing money.
A Quick Checklist
Before borrowing, consider the following. Question if:
- You require to spend the money
- You have other ways of financing what you need funds for
- You can afford to repay the funds you’re planning to borrow.
Do you really need to spend the money at all?
If you have a habit of buying things on impulse, give yourself a cooling off period of at least two days. You might find you don’t lust after it so much after giving it some time.
Some people who borrow money do so either without thinking if they can really afford it, because they feel they have no other option, but that often isn’t the case. It might be that you could put off making the purchase or not make it at all.
Ask yourself the following questions.
- Could I wait until I can afford to buy the item without borrowing?
- If there’s something I need, is there another way of getting it, for example, swapping it for something else, buying it second-hand or getting it for free from a free recycling website?
Can you save up or use some savings instead of borrowing money?
If you really don’t need to spend the money today, then you should seriously consider saving some money each month rather than getting into debt.
Questions To Answer Before Borrowing Money – Cashing in savings
If you used the money from your savings account; assuming your savings earned 1.5% a year, you would lose a maximum of £9 in interest if it took you a year to save the £600 again.
That means spending £600 from your savings would ‘cost’ you a maximum of £609 by the time you’ve added in the lost interest.
Utilising a credit card
If you paid the £600 by credit card, charging an average interest rate of 17%, and if you paid the debt back at a rate of £50 a month, it would take you 14 months to repay the debt and would cost you £58 in interest.
That means you’d be £49 (£58-£9) worse off by paying on your credit card, rather than cashing in your savings.
Good borrowing versus bad borrowing
Buying a car to travel a significant distance to work can be considered good borrowing. This is especially true if you discount the old coasts for public transport, and the value of the time saved by being able to drive direct to work. However, someone upgrading a car that functions perfectly fine and ending up paying way more than they initially borrowed due to high interest rates would certainly not count as good borrowing.
Questions To Answer Before Borrowing Money – If you do decide you want to borrow money
If you definitely want to borrow some money and you are sure you can repay it, there are a number of important factors to consider. Consider first of all how much you can afford to repay each month. And for how long you desire the repayment period to be. Ensure you are realistic about how much you could pay if your mortgage or rent went up, if you had to spend more on things like energy bills or if your pay was cut.
Questions To Answer Before Borrowing Money – Choose the optimum type of credit
You should also make sure you choose the right type of credit or loan for your situation. Otherwise, you could find yourself paying more than you need to.
Shop around and compare deals, looking at:
- the interest rate and the APR
- how much you will repay in total
- any penalties for missed or late payments, and
- the cost per week or month and whether this might vary.
Not all credit options are good or safe. If you have a poor credit rating then you might be tempted to use a doorstep lender or a payday loan company, especially if you have few credit options.
