Understanding the risks of borrowing to get what you want sooner.
For bigger financial goals, such as a new car or a house, borrowing money means you can get what you need sooner. However, it comes at a price – interest, charged every month. Banks will generally charge you less interest than finance companies.
How much to borrow?
It's rarely a good idea to borrow 100% of what you need. Unless it's a house you're buying, your purchase will usually start to devalue as soon as you take it home. After a couple of months, it's possible that your loan will be more than the value of what you bought. So even if you sell up, you'll still owe money.
Understand what happens if you get behind in your payments
When you get a loan of any sort, be aware that borrowing from lenders who take security in all your personal property (all the things you own) is a risk. If you get behind in payments they could claim the right to take all your household goods. To avoid problems, know when payments are due and make sure you have money to cover them. If you're getting behind, it's not a good idea to borrow more to re-finance a debt. Instead talk to the lender about what can be done to solve the problem.
Did you know?
Try to save for a set amount of time, so that you have a substantial deposit. Having some of your own money invested in the item will strengthen your commitment
to paying the loan off.
Be careful with hire purchase
When you don't have quite enough to pay for something and a retailer is offering a good deal on it, hire purchase can be very tempting – especially when they're offering no interest payments for a while. But before you agree to buy something on hire purchase it's important to understand the details of the agreement you're signing.
Always ask for a list of everything you'll have to pay for, such as charges to prepare the agreement, insurance and all the interest you'll pay until the end of the loan. Whoever you're buying from should tell you the all-up cost. It's often called the total cost of finance. The law says you have to be given a disclosure statement within five working days. This tells you all the details of the hire purchase deal. If you're not given one then ask for it and read it carefully. If you're not happy then don't go ahead with the deal.
When you're offered 0% interest for a while, it's important to ask what the interest rate will be on the amount you still owe after the interest-free period. Deals with 0% interest can be a good idea if you know you'll be able to pay back the loan before the interest-free period is over. Otherwise you can end up paying a lot of interest while you finish paying off the loan.
Did you know?
If you don't clear your credit card balance each month, you are effectively borrowing money. The interest charged by credit cards usually range from about 12% to as much as 20%. Be sure you know what interest rate applies to your card.
Golden rules of borrowing
- Borrow only what you need. The more you borrow, the more you have to pay back
- Avoid high interest debt, like unpaid credit cards, store cards and unsecured personal loans
- If you have a number of smaller debts – personal loans, credit cards, store cards – it can be a good idea to combine them into one loan at the lowest possible interest rate
- Secured loans cost less than unsecured loans. ‘Secured' means that either the item you're buying or other personal property can be claimed by the lender if you can't make payments
- Think very carefully before you guarantee someone else's loan - you'll have to pay for their borrowing if they don't keep up the payments
- Make sure you understand all the fees that could be charged so you don't get a surprise