Most of us will need to borrow money at some point in our lives. Others seem to live their lives worrying about debt with concerns that loans won’t ever be repaid. Why do some seem to struggle with their financial commitments while others seem to float along blissfully unaware of them? Just what is the difference between sensible borrowing and debt anyway?
Any loan, outstanding balance on a credit card or mortgage is a debt. It is money someone else gave you with the intention of you paying it back. What you did with it makes no difference. You might have used your overdraft, or perhaps you borrowed cash from a friend to pay for a taxi home. If you’re expected to clear the borrowed amount at any point in the future, then that is a debt you owe.
Some people make the mistake of thinking that an overdraft or a credit card doesn’t count. After all, it’s rare that you ever see a repayment date or an end of facility date on your statement. But there is little to stop the bank or card provider deciding that you must repay in full. And if you ever want to take another loan out, the overdraft and the credit card balance often count against you as existing debt. Of course, if nobody asks for that balance to be repaid, then it’s easy to think of it as your own money. But why continue paying high-interest rates on that money if you don’t have to?
Why We Borrow
The reasons behind why we borrow vary from loan to loan and person to person. There are plenty of things you might need to buy during your lifetime that are high value. Even if you save regularly, it’s unlikely you’ll be able to buy your house outright. A mortgage is a very large loan that is secured against the property you’re buying. This means that each payment must be made in full and on time. If you fail to do this, you might risk the bank taking your home from you to cover your debt.
The interest rate on a mortgage might seem quite small. But over the full lifetime of the loan, you might be paying back three times the original purchase price. This is a huge commitment, and you are risking the roof over your family’s head if you can’t pay it. Ultimately, the property belongs to the bank until you have completed the mortgage contract.
Owning a home is a big responsibility. Over the years, you might need to perform a few home improvements or even extend the property to fit your growing family. There are several ways to borrow money for this. The first is an extension of your mortgage. This can work out very expensive when added to the life of the loan. Another way to fund expensive renovations is to take out finance with the company providing your new kitchen or bathroom. Some will offer this loan with 0% interest. You only pay the purchase price but can spread the repayments over several months.
A personal loan from the bank is one of the most common ways to borrow money for any reason. Interest rates are rarely favourable, but you might have more chance of getting the amount you want. Of course, if the bank refuses you, then this refusal might stand on your credit report and be visible to other lenders in the future.
So long as you’re employed, a payday loan is often a guaranteed way to get a small amount of cash quickly. These are designed to be used in emergencies. Perhaps you can’t meet a big bill? Maybe the car broke down, and you can’t get to work without fixing it? Some people rely on this form of borrowing just to put food on the table. Your circumstances are rarely an issue for the lender.
The payday loan route is open to people of all backgrounds. It has recently been discovered that some people rely on this form of borrowing more than others. Often those with additional costs such as disabled people might benefit from the type of loan here. It’s important to note they are short-term and very high interest. If you find you need to apply for such funds often, it’s time to figure out why.
As discussed, we always find reasons to borrow. But if you’re going to borrow money, those reasons should be sensible reasons. Try to avoid borrowing to buy something you just spotted in a store. If you hadn’t intended to buy that particular item before you left the house, chances are it’s an impulse buy. A better approach to this is to save up for it. This gives you the time to consider if you really need it, or if you were just attracted to some clever marketing.
It’s actually a good idea to borrow occasionally to give your credit rating a boost. If you have a great credit history, you’re more likely to get a better rate when you need to borrow big, like with a mortgage. If a lot of loans have mounted up over the years with a less than perfect repayment history, you’re unlikely to enjoy the best rates for a cheap mortgage. You might not even be eligible for some personal loans or home improvement loans either. Imagine if you can’t buy that replacement car?
Sensible borrowing often goes arm-in-arm with regular saving. To restrict borrowing to only the essentials, you need to have a good pot behind you to cover everything else. Indeed, for a mortgage, you need to put at least ten percent of that purchase price plus your fees into the pot before a lender offers you anything. So how can you make sure you’re saving regularly?
The important thing to remember is that debts are repaid before you start squirrelling money away. After all, the vast majority of your loans are accruing extra costs in interest every day. The sooner you repay, the less you have to repay. Some loans come with early settlement fees, so always check these first.
Of course, one of the easiest ways to get into debt is to spend more than you have coming in. This can easily happen if you lose your job or you have sudden extra costs from an illness or home disaster. Adjusting your lifestyle and your spending to better match your income is crucial. During these difficult times, it might be impossible to bolster your savings pot. Instead, you might find it necessary to deplete it.
There are other ways you can cope with these difficult circumstances. Taking on extra work, temp work, or part-time positions can boost your income, making a frugal life more affordable. Temp work is often quick and easy to find. You simply need to spend a morning putting your curriculum vitae or resume together and pop into the local agencies. Take anything just to bring in some cash. It might not be a financially rewarding or prestigious as previous positions, but now is not a time for pride.
What is most important is that you keep your repayments going as long as you can. If you speak directly to your creditors, you can negotiate a period of reduced payments to tide you over. This is a much better approach than simply missing them. Don’t attempt to borrow more money if you have no chance of an income to cover it. You might find you’re in even more trouble! Take borrowing as a serious commitment rather than letting it become a serious debt.