Borrowing Money: When is it Necessary?
The recent recession has left many feeling short of cash and often struggling to make ends meet. With household budgets stretched to breaking point non-essential spending is simply out of the question. However, if your car is on its last legs and you need it to get you to and from work then you’re going to need money, fast.
Naturally, if you have money in an instant access account or emergency fund then this should be your first port of call; its interest free and readily available. If you don’t have this luxury available then the chances are you are going to look to borrow the money to finance the purchase.
However, choosing whether to borrow money or not is a big decision to make which is why you need to think carefully before jumping into any applications. Throughout this article we are going to discuss scenarios where it may be suitable to take out a loan or credit card and others where it may not be so suitable.
1. Is the purchase 100% necessary?
The first decision you need to make is whether or not you really need to spend the money in the first place. Is it an impulse purchase or do you have no choice but to buy the item? Often if you are in any doubt, leave it a few days to see whether you’re still keen – this cooling off period gives you the chance to comprehensively think things over and make the decision.
Generally, if you need the item for work such as a laptop or phone and your current device isn’t fit for purpose then you’re going to need to replace it. If, however you simply want a newer model because you’re bored of your current one, then it’s not worth borrowing money for.
2. Could you use a credit card?
If you’re only looking to borrow a small amount (<£1000) then a credit card may be a cheaper option for yourself. Generally banks will not lend less than £1000, and even their small personal loan product will be around 20% APR. The average credit card has an APR of 16%, however if you have good credit history you may find that you are eligible for a 0% purchase credit card.
0% purchase cards come with an introductory period where you are able to repay the balance with no interest. Once this period is over you will return to the lender’s standard rates, however providing you repay the balance within the 0% interest period you’ll never pay a penny of interest.
3. What repayments are you able to afford?
If you decide that borrowing money is the way forward then there are a few steps that you need to take prior to filling out any applications. Firstly, you need to work out how much you can afford to repay on a monthly basis – you can do this by assessing your budget.
Now that you know how much money you need to borrow and how much you can realistically afford to pay back, you can then find a repayment term to fit your affordability.
The next step
If you decide that borrowing money is necessary and you find repayments that suit your affordability then you ensure that you can manage it aptly. Your repayments should be prioritized alongside your other monthly commitments such as your rent, council tax and utilities.
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Category: Money
