Borrowing money can be a big decision. Whether you are looking to build an extension on your property, pay for a new car or take on the cost of a wedding, there are many reasons that you might need additional funds. But lending can take many different forms and it is important that you should do plenty of research before you make the decision to borrow money.
Here are six things you need to consider before you borrow money.
- Do you really need the money?
Of course the first and most important thing to consider before you borrow money is whether you actually need that money in the first place. Borrowing money can work out as very expensive, so even if you have a real need for what you are going to use the money on, there are sometimes better ways that you can find to get that money.
Consider whether this is something that you need or if it is only something that you want. If you only want it, there are more responsible ways to pay for it – for example, by saving up over time. Borrowing money can seem convenient, but if it is going to be used an indulgence it can be a pure expense.
- How long are you thinking of borrowing for?
There are two ways to think about how long you are going borrowing for. Firstly, it can look more attractive to choose a longer period of repayment as you will typically be offered a lower interest rate and much lower monthly repayments. However, it is important to remember that while the interest rate may be the lower, the longer length of the repayment period will typically end with you paying more for the borrowing than you would with a shorter contract.
Some borrowers prefer the shortest possible contract in order to get the debt paid off quickly. But this will result in higher interest rates.
- What does the small print say?
When it comes to borrowing money you need to pay very close attention to the small print found in the contract. For example, some forms of borrowing are more flexible than others. You might assume that you can make extra payments earlier in the contract if you wish – but some forms of lending stipulate charges for early repayment.
Additionally, remember that if you have been attracted to a particular lender because of the offer of a specific representative APR, there is no guarantee you will be offered that APR. Always check very thoroughly what you are being offered and if there are any stipulations that you need to be aware of.
- What is the right type of credit for you?
There are many different types of lending available. For example, you may have looked into getting a loan through a traditional provider such as a bank, but this far from the only option. For smaller amounts it can be a good idea to choose a credit card, as these are typically highly flexible and easy to work with.
If you have a poor credit history you may be tempted to use a payday loans company or a doorstep lender, however these can work out as extremely expensive ways of borrowing money.
- Are you choosing the first deal you see?
Also remember that you should not simply choose the first form of lending that you see. When it comes to borrowing money it really pays to shop around and to look at the different options available. The amount of interest that you can pay will depend enormously on the interest rate that you are offered. Make sure that you do your research and do not rush into lending, as this will almost certainly mean you will overpay.
- Should you choose a secured or unsecured loan?
If you are taking out a loan you will need to decide between a secured and unsecured loan. The difference is simple: a secured loan allows you to borrow larger amounts of money at lower interest rates, however, you are ‘securing’ the loan against the value of a property or vehicle. This means that if you fail to meet repayments, your home or vehicle could be lost.
Unsecured loans are more straightforward, however, as the loan is not secured you will usually be able to borrow less and you will pay a higher interest rate.