Debt is something that most of us have become accustomed to, but how do you stay in control of it – how do you borrow “well”?. While borrowing – loans, payday loans, credit cards etc – beyond your means is never a good idea, using debt to help take advantage of life’s opportunities can be really useful.
Good debt vs. bad debt
Essentially, the art of good borrowing is based on the distinction between good debt and bad debt. Good debt is the kind that is an investment in your financial future – this will leave you better off in the long term, allow you to deal with a short-term issue or shortfall, and there will be a specific reason as to why you want to use the debt in the first place. Most importantly, good debt is not going to have a negative overall impact on your finances in the long term or leave you in a financial hole that you are unable to get out of.
Planning is key
Borrowing money is a great way to do many things, from getting a business off the ground, to investing in a property for the future of you and your family. In February 2015, between us in the UK we collectively owed £1.471 trillion (according to The Money Charity) and the average UK household owes around £55,000 – so debt is a part of every day life for most of us. Mortgages, loans, credit cards and credit facilities are used all over the country on a daily basis. The key to making sure that you’re one of those borrowing well is to plan the borrowing that you do. Work out when you need the money – and why – as well as how you’re planning to make the repayments, and what kind of an impact the repayments will have on your monthly finances. Take advantage of the tools on our website to help you plan your borrowing.
This is fundamental when it comes to good borrowing – if you borrow more than you can afford to repay then the numbers just won’t work and you are likely to get into trouble. Start by deciding to only borrowing what you really need and then once you’ve worked out the repayments you can afford – as mentioned above – borrow so that the repayments are slightly less. This will give you a small amount of room for error. If you get to a point where you’re struggling with repayments, or you have second thoughts as soon as you’ve borrowed the money, then speak to the bank or lender. Many loans have a cooling off period in which you can change your mind and end the arrangement as long as you haven’t spent what you’ve borrowed. You may also be able to change the repayments to make them more affordable if you’re having trouble. Lenders now have a duty to ensure loans are affordable, so expect them to ask you for income and expenditure information.
Stay on top of your other finances
Top priority with borrowing is to make sure that you keep up the repayments. If you don’t then there can be all sorts of penalties, from losing your home if you don’t make mortgage repayments, to finding yourself facing bankruptcy. You may have a small feeling of recklessness when that ‘free money’ hits your account but remember that you’ve borrowed for a purpose and the repayments will start soon enough so free, it is not. Budget regularly so that you are on top of incomings, outgoings and repayments and if you need to cut back on monthly spending to make sure you meet your repayment responsibilities then do so.
Get the best interest rate that you can
We are all offered different interest rates depending on individual factors, such as credit scores, income and existing borrowing. Shop around to get the very best rate that you can based on your own circumstances and don’t take the first offer that you have, no matter how much urgency there is.
Borrow the right kind of debt
This will depend in part one the kind of interest rates that are available to you – for example, if you’re eligible for a 0% balance interest credit card and you can repay what you spend within the timeframe before the interest rate goes back up then this may be a better option than a bank loan with monthly repayments and a set interest rate. If you want to be able to borrow over a longer term then you may be more comfortable with an overdraft you can dip in and out of, where you’re only charged when you use it, or you might be able to find a repayment loan with a manageable interest rate that breaks the repayments up into smaller chunks.
Look to the future
If you feel as if you’re forever repaying debt and there’s little room for anything else then remember that the repayment plan will come to an end at some point. It’s worth regularly reminding yourself why you borrowed the money so that you stay focused, whether that’s looking over photos of a great holiday or walking around the home that you own.
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Oliver Jones has written for Solution Loans since 2015. His passion for personal finance comes through in the 150+ blog posts he's written since that time. His talent for explaining all things money means he's covered topics as diverse as...Read more about Oliver Jones