There may be many different reasons for borrowing; some of these reasons are genuine while some can be neglected to avoid borrowing that incurs a cost to disturb your future finances. There are numbers of British people who owe loans but need the fresh one. Almost £1.578 trillion debt was owed by British individuals in February 2018. The average debt per British adult was £30,537 in February 2018. £1,790.4 billion was due on the public sector in 2018. It means individuals and business owners both rely on borrowing to meet out the fund’s requirements but repayment becomes a problem and they continue to pay the interest rate for longer than the agreed period. Holding a loan longer than the agreed period is quite possible because of flexible repayment period term often offered by direct lenders but it disturbs the borrower’s financial growth. Therefore, you should know the best time to borrow.
Here, I list 6 times when borrowing is Okay:
- If You Can Afford On Time Repayment: Because of wide-scale availability of direct lenders and Govt. financial institutions, borrowing with any credit history is not a very tough task; even some lenders offer no credit check loans or bad credit personal loan also. If the present earning allows repaying the monthly installments for the entire repayment period, only then go ahead to borrow. Don’t be misguided by the temptation of understanding yourself capable to pay the installment by arranging money from somewhere. Getting the second job, freelancing some work, selling some stuff on e-commerce store like eBay are some options to increase the income to pay off the loan.
- If The Intended Purchase Is Urgent: Some purchasing ideas can be postponed as there are some necessities that seem urgent just to make the everyday life more comfortable. Borrow only if the intended purchase is essential and urgent; and, you can’t afford to postpone it. For example, borrowing for a vacation tour or kitchen remodelling can be postponed but getting the car repairing or roof repairing is essential.
- If You Are Good Credit Score Holder: Credit score in the UK is measured in different styles by the different credit score ranking agencies. Experian & Equifax is used by most of the direct lenders to scale the borrowers’ credit score. These agencies allow the individuals also to check their credit score themselves. If you find your credit score in average – good range, you are more likely to get the affordable loan deal. The good credit score itself denotes that you are capable to manage the debts because of regular earning.
- If The Interest Amount Is Less Than Expected Investment Return: If you are planning to borrow for investing in the high-profit deal, ensure that the return would be more than the interest amount you will pay for the entire period. Your savings and emergency funds should remain unaffected during the repayment period. For example, if the investment plan guarantees for 12% annual profit but the loan costs 4% monthly, it is not okay to go ahead with an investment plan with borrowing. Don’t take long-term installment loan as the alternative to reduce the monthly repayment amount because it may cost more than the total expected profit at the end.
- If You Can Pay Back The Loan Early: If you have adequate regular earning and you are sure to earn at least the same for the entire repayment period, you may think for borrowing. If you are not sure about the future earning, avoid borrowing. The repayment liability surely hits your bank account. Plan to repay the loan earlier at least 2-3 months before provided the lender doesn’t apply prepayment penalty. For example, the pending loan amount can be paid earlier with the funds you get a commission or bonus.
- If You Qualify For Special Category Loan: The UK Govt. offers a variety of loans to help the people in financial crisis because of diverse reasons. Job seekers allowance for unemployed people is the best example of such a facility. Similarly, the low-cost loans are available for home-buying, energy-efficiency plan, education etc also. Credit unions also provide a low-cost loan. If you qualify for the low cost or interest-free special loan category, it is okay to borrow.
How To Reduce Borrowing Cost:
Before directly heading to direct lenders, try to shop the loan around yourself; explore all the resources. Early planning to borrow can save considerably because it gives you enough time to check and improve credit score by paying off the small amount loans or bills that harm the credit report. Just a few months before borrowing, focus on debt to income (DTI) ratio. Lower DTI means better loan deal; the standard DTI ratio for reasonable borrowing cost is 40%. Securing the loan by pledging some asset or arranging a guarantor is also a good practice to reduce the borrowing cost.
The UK people have numbers of well-regulated resources to meet out the funds’ need for any purpose but the borrower must know – when it is okay to take a loan and at what cost. Assessing the requirement, justifying the borrowing need, exploring all the options, comparing the offers are the key steps for affordable borrowing.