Making the Most of Your Money Borrowing

Making the Most of Your Money Borrowing

Making the most of your money – borrowing

Welcome to this module on borrowing, where we’re going to look at short-term products such as credit cards and longer term products such as mortgages.

We’ll be looking at the key considerations around both areas. But first, we’re going to think about credit ratings and how they are used.

So, what is a credit rating? As you can see on screen it’s a score, based upon individual circumstances and history. It’s based upon things like whether you make your payments on time, whether you’ve ever missed payments or whether you’re on the electoral role. It has a significant impact on your ability to borrow money.

For most types of borrowing, lenders will look at your score to see if they wish to lend you in the first place and importantly, at what rate.

Have you ever checked your own credit history? If not, then you should add this to your list of actions. Checking your credit report is useful to ensure the information held about you accurate and up-to-date. A basic report will cost only £2 and you can find details on the Money Advice Service website for how to do this.

Before we look at some of the features of short-term borrowing, just remember, anything that’s borrowed will need to be paid back with interest.

So, you’ll be paying more than the goods cost you originally. When it comes to borrowing, we need to make sure that we are choosing the right product to meet our needs.

Here are some typical forms of short-term borrowing. If you’re using a credit card or store card, try to reduce the balance quickly as the cost can be expensive if only the minimum is paid each month.

If you have a balance on your card, you could use the Money Advice Service Credit Card Calculator to see how long it will take you to clear the balance based upon your current circumstances.

Overdrafts are designed as a safety net, not as an addition to your monthly salary. Personal loans are normally unsecured, which means they are more expensive than mortgages but still cheaper than other types of borrowing.

With higher purchase, the ownership of the goods is not actually yours until the final repayments have been made. So, consider that you can’t sell the goods before the payments have been completed.
Credit unions are an alternative to banks and building societies and you need to check locally for availability. They are not profit making and can lend small sums of money once you’ve built up a bit of a savings record with them. There are a couple of things that influence the cost of borrowing, one of which is how long you borrow for.

Let’s have a look at a real-life example. If you were to borrow £10,000, paying 7.5% as an interest rate over five years, as you can see you would pay just under £200 per month and the total payments would be just under £12,000.

Now, how much more do you think it would cost if you borrowed the same money over 10 years instead. You can see, it costs over £2,000 more. It really pays to take the money over the shortest period of time you can afford.

The annual percentage rate or APR is the other key factor you should consider when borrowing money. APR is the true cost of a loan. It includes any charges and fees on top of the interest rate.

We’re looking at the same example as from the previous screen but seeing what impact the APR has. So, how much more do you think you would have to pay if you were to double the rate of interest from 7.5% to 15%. Over £2,000 more again. So the key message here is it really pays to shop around and make sure your credit score is as good as it can be.

The principles we’ve just looked at apply to long-term products as well. There are however other things we need to consider, particularly when looking at mortgages. So, think about if you can afford the repayments. Have you thought about what you would do if your interest rate went up? Or perhaps your personal circumstances were to change?

On the Money Advice Service website we have a Mortgage Calculator to help you work out how much your payments would be if there was a change is interest rates.

You also need to think about what happens when your current deal or rate comes to an end. Do you need to shop around or seek advice? Depending on your situation, it may be worth looking at other deals but make sure you check out any penalties in your key facts documentation.

If you have an interest-only mortgage, you need to have a suitable plan in place to repay your loan when it comes to an end. So make sure you review this plan on a regular basis. If for any reason you or someone you know is struggling to manage their debts, it is vitally important for you to follow these steps.

Budget carefully and prioritise your payments. We have a Dealing with debt page on the Money Advice Service website that can assist you there.

You can get free help and advice from a number of independent organisations here on screen.

It’s always important to act quickly. Do not put your head in the sand.

So let’s recap what we’ve covered in this module. Only borrow what you can afford to repay. Not just now, but if interest rates change or your circumstances change.

We’ve looked at a number of options and it makes sense to choose the most suitable for you. It pays to shop around. This can save you money and there are a number of comparison websites available to help you do just that, not forgetting of course the Money Advice Service website.

Now jot down the actions you’ll be taking next.