Are you in need of cash but worried about damaging your finances?
There are lots of options when it comes to borrowing money, but you should be aware of the risks and proceed with caution so as not to implicate your current financial situation.
Maybe you need the extra funds to tide you over until your next payday, or perhaps you have a financial emergency that requires a payment you can’t afford. Whatever the reason, there are ways to borrow money safely and sensibly. Carry on reading to find out how!
Know Your Options
Before you decide which route to go down, assess why it is you need to borrow the money.
It’s better to avoid borrowing money that will be difficult to repay and offers very little return. But if you decide the money is necessary, or will substantially help you in the long term, then you now need to work out the most appropriate, cost-effective way to borrow.
Borrow From Family Or Friends
Borrowing money from friends or family has its benefits, and if you choose this route, you may avoid having to pay back large amounts of interest.
This way of borrowing should be taken as seriously as other options, as things can get complicated if you don’t manage to pay the money back.
Clear communication from the onset is important when accepting a loan from loved ones. Chances are they’re going to want to help you as best they can, but you need to make sure that they can truly afford to lend you the money you’re asking for.
Depending on the size of the loan you require, you might want to consider getting a formal agreement written down and signed by both parties. For helpful guidance on this type of borrowing, refer to the Money Advice Service
When you take out a credit card, you obtain a certain amount of credit which you can spend by card. Credit cards are useful if you want to make a big purchase but don’t have the spare cash to hand.
Credit cards are particularly beneficial because there are lots of options you can choose from, from the amount you can borrow to varied interest rates. As long as you manage to pay off the card’s balance each month, you aren’t required to pay interest.
A loan is a sum of money that is leant out by a lender under a contractual agreement and required to be paid back with interest. Depending on which loan you choose to take out, the loan period, loan amount and interest rates will vary.
As there are a number of loans available to suit different financial needs it’s important to do your research before making any quick decisions.
Understand The Costs Of Borrowing
The more you understand about the costs of borrowing money before you go ahead and borrow, the better.
The most important thing to remember is that whenever you borrow money, the amount you end up repaying is nearly always more than the amount you borrow.
Tip: It’s vital to check your credit report before choosing to borrow money. You will then know what a potential lender is looking at when deciding whether or not to grant you a loan. To help you work this out, Experian offers free, reliable online credit checks.
Interest rates vary between loan types and lenders. Generally, the longer you have debt, the more it will cost you. BUT, don’t agree to repay a loan faster than you can realistically afford to as this has serious financial consequences.
Compare loans and lenders using either a loan comparison site or by doing your own research. Interest rates indicate the price at which you are able to borrow money and the Annual Percentage Rate represents the amount of interest you’ll pay annually on any money borrowed. The APR takes into consideration any other charges you’ll have to pay, which is why it varies from lender to lender.
Interest rates change regularly so if you can, take out your loan when the market is favourable.
Use Money Saving Expert’s Loan Calculator to help work out the cost of a loan and whether it’s cost-effective for you.
Be Realistic With What You Can Afford
Once you’ve established the cost of borrowing, carefully consider how you plan to pay for repayments, so as not to hurt your finances in the future.
Double and triple check the terms of repayment; including features of the loan you’ve agreed to and how long the loan will last if you make the minimum required payments each month.
You risk damaging your credit score if you don’t manage to make repayments on time. However, if you do keep on top of your repayments, borrowed money can actually build your credit.
Depending on how you choose to borrow money, you may be eligible for a ‘repayment holiday’, which allows you to stop repayments for an agreed period of time (usually one to two months). Repayment holidays are useful when your financial circumstances change unexpectedly, but be advised that during the repayment holiday period interest continues to grow.
A lot of lenders will let you choose the day repayments are taken from your account. When you agree on your repayment structure check that your lender doesn’t have any restrictions on early repayments, as this could mean you save by paying back less interest.
Make sure you keep on top of monthly planning and budgeting. If this is something you struggle with, Citizens Advice has a helpful budgeting tool to help you work out where you might be able to cut costs.
To stay on top of your finances, carefully go through the numbers and each month, in the days leading up to your repayment date, check your account to make sure you have sufficient funds to cover all costs.