There are many different ways to borrow money. Banks make the majority of their profits through lending, and so they work hard to promote their overdraft, loans and credit card offerings. While it may be tempting to use these credit facilities to buy new things, it’s important to consider whether you can afford to borrow before taking out any lending.
All credit has to be repaid, and with interest on top. The amount of interest that needs to be paid differs from product to product. APR, or annual percentage rate, indicates how much interest needs to be paid back on lending. For example, if a loan has a 10% APR, that means that the annual interest cost of the loan is 10%; i.e. a £1,000 loan would accrue £100 in interest each year. Loans usually have lower APRs than other forms of lending like overdrafts and credit cards.
The consequences of non-payment
If a credit bill can’t be paid off, there can be a number of negative consequences.
Secured loans are type of loan that use your assets as collateral in case payments cannot be made. If bills are missed and you are unable to cover them, the lending institution are able to repossess whatever assets you used as security to cover their costs.
Unsecured loans, credit cards and overdrafts work differently. These forms of lending are not secured on any assets, meaning that the bank has less security. Often, if bills are missed, expensive penalties and fees are added on top of the cost of lending and, if a large number of bills are left unfulfilled, the lending institution may use bailiffs to recover their costs.
The worry of looming and unpaid bills can also cause a lot of stress and anxiety, which can be damaging to your health.
Due to the negative consequences of a failure to pay, it’s important to make sure that the cost of lending doesn’t exceed monthly income, and that safe guards are in place to ensure that bills can be paid in case unforeseen consequences such as unemployment occur. If your situation does change, its important you contact your lender and tell them. You may be able to sort out a new payment plan.
Calculating how much you can afford to borrow
Calculate your monthly income and your monthly outgoings, including food, bills, transport costs, and then use this information to calculate how much extra money you have available each month.
Of this available money, try to set aside no more than 70% for the purpose of lending. So, if you have £500 of money available each month, try to make sure your monthly lending bills don’t exceed £350 a month. Any left over money should be set aside in a savings account. Over time, this savings account will grow and can act as a safety net in times of hardship.
Many lending providers also provide insurance that can help in extenuating circumstances, such as unemployment and ill health. The cost of this insurance varies, but it’s normally quite affordable. It is highly recommended that you take out this insurance as it can provide a great deal of help if your financial situation changes.
Lending can be very useful, but it’s important to make sure that you don’t borrow more money than you can afford to. By budgeting carefully and monitoring your income and monthly outgoings, you’ll be able to borrow money without worry of borrowing more than you can afford.