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When is Borrowing a Good Idea?

26 March 2018 No Comment

Although there have been more restrictions put in place since the economic crash of 2008, it’s still possible to borrow money from a variety of sources by taking out a loan or using your credit card. Providers are constantly advertising their lending products, making it sound as though this is a solution to any cash flow problems you may encounter, and emphasizing the immediate benefit rather than the long-term cost. There are times when a loan is a perfectly reasonable course of action, but there are also times when you should avoid getting into debt; the trick is to know the difference.

When it’s ok

First, you need to be sure that you can keep up the repayments without overstretching yourself. You need to complete an accurate and realistic assessment of your financial situation and see how much you can reasonably afford each month. Don’t be tempted to adjust the figures to make the loan seem more manageable. If you aren’t honest about your outgoings, you’ll soon find you are struggling with the repayments. It is nearly always best to use existing capital before looking at borrowing money, but if your investment returns are higher than your interest payments would be for a loan, you are better off keeping the investment going. Examine why you want a loan, for example, if you drive to work and need a car, or you want to do a course that would boost your earnings, a loan would be a reasonable investment. You are likely to be offered lower interest rates if you have a good credit score so check exactly what you would be paying, as advertised rates can differ to your personal offer. Don’t go for the first offer you see, either. Check out a provider’s reputation, make sure you compare rates.

When it isn’t

Don’t get a loan to finance a lifestyle that is beyond your means. Just because you’d really like an expensive vacation or a new kitchen doesn’t mean a loan is justifiable. If you get into debt to fund these kinds of expenditures, you will end up worse off and caught in a debt spiral, where the repayments leave you with little cash to spend on luxuries and you take out a new loan or a new credit card to pay for the next lifestyle choice. If your prospective lender asks for a co-signer, it means they are not convinced you will be able to keep up the repayments and want a responsible person to agree to take on the debt if you stop paying. If the lender is doubtful about your situation, this is a good sign you need to reconsider the viability of your loan. If you go ahead, you run the risk of damaging your credit score even further, plus you could cause friction and rifts with the person who assumes your debt, possibly damaging that relationship permanently. If your credit score is low, you will also pay a higher rate of interest, which means your repayments will be higher each month and therefore less affordable.

If you need some cash in a hurry, see if you can get some extra hours at work or a part-time job, or have a look at what you could sell to get what you need. Use a loan if it’s viable, but not out of desperation. It’s far better to work on fixing your credit score to make borrowing easier and a better option.

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