The simple answer to the question of how to borrow sensibly is simply this: don’t borrow. Live within your means. Don’t spend more than you have.
Which all sounds great – but of course it is not the real world that most of us live in. Sometimes we need to splash out on something for a special occasion. We might need to borrow to buy a car, or even a house.
The fact is that almost every single one of us will, at some point in our lives, need to borrow money. So how do we go about sensible borrowing? Here are a few key pointers to remember.
If you can’t pay it back, don’t borrow it
More often than not, money issues are a question of cash flow. We need money for a bigger than usual expense – that present, or car, or house. The point of the loan is that while we don’t have the money right now, we will have enough to pay it back over a longer period.
Of course, thanks to interest, we’ll pay back more than we originally borrowed, but that is how the system works. The key is that we can pay it back, either in terms of an affordable regular monthly payment, or a lump sum at a later date.
The bottom line of sensible borrowing is this: work out how much you will need to pay back in total before you borrow. And if you can’t pay it back, don’t borrow it in the first place.
Borrow short-term, whenever you can
Building on this, it’s also worth remembering that the longer you take to pay your original loan out, the more you will pay. Whether it is in interest rate payments, or fees, it’s inevitable – it is, after all, how the lender makes their money.
So, when you take out your loan, work out exactly what impact the repayment period will have on the amount you’ll repay. It is particularly important on a big borrowing like a mortgage, where the repayments can span over decades.
When you are agreeing the terms of the loan it is important to strike that delicate balance between stretching the repayment term to keep the monthly repayments down, with any impact on the total amount you are paying back.
Sensible borrowing – borrow for things you need (rather than things you really want)
This is the tricky one. The whole of our consumer society is predicated on the idea of making us think we need (rather than just want) everything.
The line between what we really want and what we really need is a very blurry one – but it an important distinction, particularly when it comes to borrowing.
Our advice is simply this. Don’t borrow money for things you want but don’t need. Borrowing for luxuries is never a good idea, because it directly impacts your ability to buy the things you actually do need (like food and paying for water and heating).
So, think very carefully about whether the thing that you’re stretching to afford is a priority, or if you should be spending your money on something else instead.