Borrowing money: It’s something we are all tempted to do from time to time. We’re not talking about borrowing money from a family member or friend. Rather, we are talking about the loans we might consider when looking to enhance our lives.
The most common reason to borrow money is to buy a house, of course. Many of us are keen to get a footing on the property ladder at some point in our lives. But we might also borrow money after we have considered the costs of renovating a house, or we might seek a loan for any purchase that we have our heart set on. A new car anyone?
We are a nation of borrowers, and on the surface, there is nothing inherently wrong with this. However, mistakes can be made, and these could sometimes cost us dearly. Take a look at the following for example and ponder on them if you’re thinking about taking out a loan. Learn from them so you don’t make a mistake that could hurt your life and bank account.
Mistake #1: Assuming a loan is your only option
There are times when a loan could be your only option, such as when you’re getting a mortgage for your home. But for smaller purchases, you could borrow money from people you know, as they are unlikely to charge you high-interest rates.
You could also make a concerted effort to save your money, as it might be that you will one day be able to afford what you want or need without the burden of loan payments. And what about selling items you don’t need?
The money you make could cover some of the costs of whatever you’re after. And you could make money from a side hustle too. You would avoid debt if you considered these options, so think twice before borrowing.
Mistake #2: Borrowing money to cover your debts
Many people get into debt, and they often make life harder for themselves by borrowing money to pay off existing debts. This is a real problem, as they can then push themselves into debt further, especially if they borrow from disreputable sources with massive rates of interest.
So, my point is this. If you’re in debt, don’t assume borrowing money is your only way out of the hole you are in – you will only dig a bigger hole for yourself. Speak to a debt relief charity for help, and use the tips given by Experian for getting out of your debt faster.
Mistake #3: Not doing your sums first
There are times when borrowing money might be necessary, but care does need to be taken. You need to know what you’re letting yourself in for before signing on any dotted line, and this means taking fees and interest rates into account. If you don’t do your homework first, you might start to struggle later when you realize that you can’t afford to make the monthly repayments.
So, use a loan amortization calculator to get a better idea of what you will be expected to pay, and consider the next point if you suspect the repayments will be difficult to manage.
Mistake #4: Not shopping around
You don’t need to accept the first loan offer you find, especially if the interest rates are particularly high. While it can be an arduous and time-consuming task, it is better to commit to research and shop around, as you might find a loan that has more favorable interest rates.
So, compare loans online, perhaps using one of the many comparison sites that can be found on the internet. Then call different lenders if you feel able to, as they might be able to offer you a fairer loan than what you have seen online.
Mistake #5: Not paying attention to your credit score
If your credit score is poor, you might struggle to get a loan from reputable providers. You might then be tempted to borrow money from those loan companies who promise payouts regardless of your credit score.
While such companies can seem like a godsend, they can also become your worst nightmare, as their interest rates are often much larger than what you should reasonably expect to cover.
Of course, you might still get a loan from a reputable bank if your credit score is low, but again, the interest rate will likely be higher.
So, the takeaway for you is this. Check your credit score with a company akin to Experian or TransUnion, and if it’s not as good as you hoped it would be, do what you can to improve your credit rating. By doing so, you will find it easier to get a loan with an interest rate that is more affordable to you.
Mistake #6: Borrowing more money than you need
Here’s the thing with some people. When they’re applying for a loan, they sometimes apply for more money than they need because they convince themselves they should. That extra money will come in handy, they tell themselves. They suddenly decide on other purchases that they might be able to get their hands on if they increase the loan they are applying for.
And so they take out a loan that is more than they originally needed. Is there anything wrong with this? Well, maybe. The loan repayments will be higher, and this can be an issue.
There might also be a longer-term to pay the loan back. This in itself can cause issues down the line, especially if their financial situation worsens.
So, consider this for yourself. While you could borrow more money than you need, it might make more sense to focus on why you’re applying for the loan in the first place. For the long-term health of your finances, you don’t want to borrow money that you might one day struggle to payback!
So, think twice before signing on any loan application form. Mistakes can be costly, so be sensible, use your head and not your heart, and only borrow money if you’re sure it’s the right thing to do.