Deciding whether to get credit. 

I cannot even begin to stress enough at just how important affordability is on any finance. If any borrowing is taken out which people can’t afford it then the chances are repayments will be missed. Failing to make the financial commitments as required can often result in severe negative consequences for the people involved and most people will want to try to avoid this from ever happening. It will not matter whether a person has borrowed online payday loans for relatively small amounts, installment loans over longer periods for potentially higher amounts or even credit cards the finance should be affordable so the debt can then be successfully repaid. Below are some thoughts people can use to check to see if any borrowing is affordable and also how some types of borrowing is more affordable and realistic for people to repay than others.

Before starting to consider any form of credit, the first consideration is whether it is actually needed. With loans becoming more and more accessible and a population relying more and more on credit, it is easy to see how credit can be used for things when other, cheaper, solutions may be an option. Most forms of credit will cost money and therefore if you do not need to use them, you will be better off financially overall. When making this decision, as yourself whether you really need what it is you are seeking credit for. If it is a broken car or a new boiler, then the answer may be yes. If it is for a good night down the pub, then it may be better not to use credit for this activity and have a night in instead. Again, if it is a necessity to borrow money, are there any cheaper sources available, for example a friend of family member.

Having decided that credit is needed and that there are no friends of family that can help, the next step is to review how much you need and more importantly how much you can afford to repay. Of course lenders will want to lend you as much as possible as they will get more interest that way. However, it is best to only borrow what you need. If you only need £200, then don’t be tempted to accept an offer of £300. While the extra £100 may sound tempting to allow for that extra treat, or a buffer in case it is needed, this is likely to cost you half as much again in terms of interest and repayment amount.

A budget to work out what you can afford to repay is also critical at this stage. Many people, especially where the borrowing is driven by an emergency, tend to allow the importance of the need for cash to completely override the concept of how it will be repaid. It is very easy to say “well I has to borrow the money as I needed the car for work”, maybe even trying to justify that you know you will not be able to make the repayments upon the urgency of the current issue, however this will only cause more heartache later on. When formulating a budget you can either use a pen and paper, or it may be easier with an online budget planner. It is really important that you add in ALL of your expenses, however small. Be totally honest and do not try to hide anything. Also make sure that your income is realist and consistent. Just because you got a bonus this month, if this is not guaranteed every month, do not include it. Also watch for annually paid items that may fall due in a given month, such as car insurance.

At the end of all of this you should know how much you need and how much you can afford to repay each month.

Now it is almost time to head to the internet to search for loans…but wait just a moment. Before you do, have an honest think about your creditworthiness. If you are unsure, you may want to search for a site offering free access to your credit score. This will give you a chance to see which part of the lending market you should be searching.

If, for example, you have only got minimal other credit commitments and you have always repaid your loans in time you may be able to search for what is known as ‘prime’ lending. This will nearly always be cheaper than sub-prime lending such as Payday Loans.

Prime lending would be things like a loan from Barclays Bank, or a Lloyds Credit Card and would almost certainly have a lower interest rate than sub-prime borrowing such as an Aqua Credit Card or Payday Loan. If you were a ‘prime borrower’ you would be doing yourself an injustice (and pay more) if you went for a sub-prime product, whereas a borrower with poor credit history may be wasting their time applying for a bank loan.

Now you need to do a search for the type of lender, and product, you require. When you have found a handful of lenders you should review the products they are offering. Many have a ‘slider’ that allows you to put in a loan amount and term. It then shows you the monthly repayment amount. Only proceed with a loan if this fits into the budget that you worked out earlier.

If you decide to apply, make sure that you read all of the T&C carefully. If there is anything that you do not understand, or if you are worried about the affordability or suitability of the product, speak to the lender BEFORE you complete the application process.

While this is clearly only some thoughts on borrowing money, and needs to be tailored to your specific circumstances, if you take on board some of the things discussed in this article you should be in a position to make good decisions regarding your borrowing.

Warning: Late repayment can cause you serious money problems - For help, go to moneyadviceservice.org.uk

This article is not intended to contain information about, or advertise, products offered by us but is intended to contain information, give opinions or discuss generally available products/services.

Author: Internal Customer Services Agent