10 Things To Ask Before You Borrow Money

Millions of people borrow money every year, but that’s not to say it’s always the right thing to do. Before you borrow money, it’s important to think it through and make sure it’s right for you. To help, we’ve put together 10 important questions you should ask yourself before applying for credit and then you’ll have all the answers you need to make the best decision.

1) What do I need to borrow money for?

There are lots of different reasons to borrow money… new car, home improvements, wedding plans, a luxury holiday… but that doesn’t mean it’s always the right idea. Whatever dream you have in mind, ask yourself if you really need to borrow the money. Distinguish between needs and wants. If your car breaks down, you might NEED a new one to get to work; whereas upgrading to a fancier car is usually just a WANT.

2) Can I just save up the money instead?

Yes, you could! This can be a great alternative to borrowing money from a lender if you’re thinking of borrowing to pay for something you want, rather than need. For example, if you’re looking to get credit to pay for something like a holiday, why not make it your goal to save up over the next year instead?

Don’t get us wrong, there are many pros to borrowing money. It means you can have the cash straightaway to do the things you want… but it could cost you a lot in interest!

3) How much should I borrow?

Only borrow what you need and can afford - no more! It can be tempting to take out an extra little bit to treat yourself, but it’s unnecessary. You’ll be getting yourself into more debt for something you don’t really need. And more debt means bigger monthly repayments, as well as a higher amount of interest. Doesn’t sound worth it to us!

4) How do I know if I’m eligible?

Most lenders now offer an eligibility checker tool, which lets you know if you’re likely to be approved for credit or not. We definitely recommend using one of these first, as they won’t affect your credit score, unlike a full application! An application for finance leaves a mark on your credit report which lenders can see… and too many of these can lower your credit score and hinder your chances of getting accepted.

5) Can I afford the repayments every month?

This is one of the most important questions to ask yourself! Don’t leave it to chance or guess work. Now is the time to crack out the budget. Work out how much income you get every month and then subtract your essential costs, such as rent or mortgage payments, household bills, car expenses, groceries etc. What’s left is your disposable income. Remember that you want to keep some of this back for your leisure activities – whether that’s eating out, going to the pub or buying clothes – so don’t use all of this up on simply repaying credit.

6) What type of finance should I get?

Ready for the list...? There are credit cards, overdrafts, payday loans, secured loans, personal loans and mortgages. Each has different loan amounts, repayment terms, interest rates and requirements – so it’s crucial that you do your research first and check which type of credit is right for you, your needs and financial situation.

For example, secured loans are only available to homeowners and mortgages are only available to those buying a property… with a credit card, you can dip in and out of borrowing with it as long as you keep up with the minimum payments and stay within your credit limit , while personal loans lock you in for a fixed amount of time and repayments, but could allow you to borrow more than you can with a credit card.

7) How long do I want to be repaying for?

A few months? A year? A few years? 10 years? We can’t answer this one for you as it all depends on what you’re comfortable with. Usually, the higher the credit amount, the longer you’re going to need to pay it off and the more interest you’ll pay.

If you can afford to repay quickly, then avoid stretching out the length of your borrowing unnecessarily, as this could cost you more in interest overall. On the other hand, don’t get such a short term loan that you’d struggle to make the repayments on a monthly basis. Try to find a happy medium where you’d be able to afford the payments even if your circumstances changed. Remember, you can always make overpayments if you find yourself with some extra cash.

8) Which lender is right for me?

With hundreds of lenders out there, it’s hard to know which one to go with. All legit loan companies in the UK have to be registered with the (Financial Conduct Authority), who are the regulator for the finance industry in the UK. But, there are still some shady characters out there trying to pull the wool over your eyes. Make sure you check the FCA register to make sure your chosen lender is on it before you apply.

Next, consider specialist lenders. For example, if you have bad credit, look for a company who welcomes poor credit histories because you’ll have a better chance of being approved. Or if you’re thinking about borrowing money for a new car, why not use a specialist car finance company?

9) How much will it cost me to borrow money?

That’s all down to the interest rate attached to the financial product… the lower the rate, the less it will cost you overall. But how long you take to repay the credit also affects the cost of borrowing. For example:

Say you took out a £5,000 personal loan over three years with an APR of 8% (which was the average rate for a loan in 2019) that would cost you £617.39 in interest.

Now say you took out the exact same loan but over five years, it would cost you £1042.92 in interest.

10) Should I improve my credit score first?

It couldn’t hurt to! Only good things can come from improving your credit score and there are many ways to do it. Firstly, check your credit report online and check for any mistakes, such as typos in your personal details, old financial associations, incorrect credit amounts, and CCJs or defaults that are more than 6 years old (as these shouldn’t appear on your report anymore). Another tip is to join the electoral roll – a really simple and effective way to give your score a boost!