How to make borrowing safe
It’s often said there are two types of borrowing: the good kind and the bad kind.
If we borrow responsibly with a repayment plan in place from the start, we can afford to buy things that’ll enhance our lives or we can work to clear existing debts to begin again with a clean slate. That’s safe borrowing. One thing is you can also apply for a credit card to pay your debts in an instant but don’t overuse it and it might cost you more debts. If things come to worst and your credit card needs to be fixed you can visit Lexington Law Review.
On the other hand, bad borrowing comes in the form of unaffordable credit with high interest rates and unacceptable risks attached.
What is safe borrowing?
It can be tricky to tell safe borrowing from risky borrowing, but the differences can usually be boiled down into a few questions:
- Is the borrowing affordable and for a specific purpose?
- Are the interest rates reasonable and can you afford the repayments?
- Is the borrowing designed to consolidate existing debt and make it more manageable?
Ideally, the answer to the first two questions should be yes, while anyone looking to consolidate debts should also make sure they can afford repayments and that the interest rates are manageable.
When is borrowing a good idea?
For borrowing to be a good idea, the repayments should be manageable, but the money should also be for a specific and necessary purpose.
Here are some examples of affordable borrowing with a purpose:
- A mortgage to buy a property. As a mortgage replaces rent payments and is spread over a long period of time, taking out a mortgage can make economic sense – as long as the monthly payments are affordable.
- Taking out a loan to replace a car. As well as being a vital method of getting from one place to another for many people, cars are financial assets.
- Taking out a loan for home improvements. These can enhance your living situation and increase the value of your home.
- Using an overdraft to cover a shortfall when changing jobs or waiting for a delayed payment.
All these situations have a defined purpose and, as long as repayments are affordable and met each month, borrowing for these reasons could have long-term benefits.
Plus, researching before taking out a credit product can offer better repayment deals. As an example, the personal loan comparison tool from Choose can help compare representative interest rates without approaching lenders directly.
Borrowing can be unaffordable and unnecessary if someone doesn’t have the means to make the repayments or is borrowing to fund a purchase they don’t necessarily need.
Examples include:
- A brand-new car with higher monthly repayments than the borrower can afford.
- Taking out a credit card on a high interest rate to fund shopping.
- Using a credit card or overdraft to pay everyday bills.
Borrowing should never be used to cover everyday living. It can put people in a debt cycle, paying interest on debts instead of using their money for bills and more exciting things.
The Money Advice Service has more information about what counts as good and bad debt.
What alternatives are there?
When we think of borrowing money, we usually think of loans, credit cards and overdrafts. Some of us may even think of high-cost short-term lending like payday loans or doorstep borrowing to help tide us over.
As Citizens Advice points out, though, credit unions are an alternative form of borrowing providing credit at a low interest rate to people in a shared location, working for the same employer or active in certain associations, trade unions or churches.
Credit unions unfortunately aren’t available to everyone, so the next best thing we can do is approach a lender we already have a relationship with such as our bank or building society. Some cheap borrowing options are only available to existing customers and aren’t necessarily publicised well.
Avoiding borrowing altogether
Sometimes, borrowing isn’t the answer. If it isn’t affordable or we can’t get decent rates due to a poor credit record, we can try prioritising our debts and work alongside our lenders to get back on track.
If this sounds like an impossible step for someone in debt, start by understanding which debts are priorities by using this guide from debt charity StepChange. After that, contact creditors and explain the situation. Many lenders and companies will work closely with customers – after all, they want to get their money in the end.
Borrowing can definitely be safe if potential borrowers carefully consider their options and understand the risks of missing repayments. For many large purchases, borrowing is the only way forward, and that shouldn’t necessarily be seen as an obstacle.
*This is a collaborative post.
