Borrowing from the Bank
Borrowing from your bank can be a very useful way to smooth out the gaps between your income and expenditure. It can also help you to pay for larger purchases (for example a car or holiday) so that you can enjoy the benefit straight away, rather than saving up first.
Used sensibly, borrowing money can be a very good tool for managing your finances, such as spreading the cost of a purchase over a number of months. The key is to remain in control of your money and to make sure that you don't over-stretch yourself.
First of all, take into account any savings that you may have if they are not ear marked for anything else, it might be cheaper in the long run to use this money, rather than borrow.
Give some thought to what you need to borrow money for. Is it to pay an unexpected bill, or cover some other short term gap between your income and expenditure? Or do you need to buy something more expensive (like a washing machine or new furniture) where you would like to spread the costs over the life of the item that you are buying?
If you only need help with your cash flow, or you feel that you can repay the money that you borrow over a month or two, you may be better off using an overdraft facility. Let's face it most people have an overdraft facility set up on their current account. Overdrafts, if used appropriately, can be a godsend, but reckless spending can land you in deep financial trouble.
It is important that from the outset you know exactly how much your overdraft is costing you. Be aware of the interest rates and any other fees and always read the terms of your contract.
An overdraft facility simply allows you to spend more than the amount that you hold in your account. There is usually a limit that has been previously agreed between yourself and your bank.
If you happen to exceed this agreed limit you will no doubt have to pay a penalty charge and a much higher rate of interest.
You can end up in financial difficulty for exceeding this limit - for example, the bank may send you reminder letters urging you to pay money into your account, or they may even freeze your account until the overdraft limit is fully paid.Loans spread repayment over a number of installments and can make it easier to spread the cost of larger items of expenditure, such as a loan for a car.
To borrow over a longer period, a loan with regular monthly repayments might be more appropriate. This way, you are effectively paying for the item that you have bought as you use it. Do be careful to ensure that you are not left with a loan outstanding for longer than the useful life that you anticipate for your purchase; otherwise you might need to replace it before you have finished paying for it.
It is vitally important that you consider carefully whether you can afford to take on (or service) any borrowing. The best way to do this is to draw up a budget plan of income and expenditure. By adding up all you monthly income and deducting your monthly outgoings, you will get a clear picture of any money left over at the end of each month, that can be used towards making repayments.
Credit Cards
The popularity of credit cards has risen dramatically over the last 10 years and now the market is saturated with special offers and new products.
Looking for the right credit card for you can be an overwhelming task, however, there are some basic things to make sure you take into consideration before you settle on one.
There are so many different cards, each offering different deals that it is very difficult to decide which is the right one for you. First of all you need to figure out what kind of borrower you are. If you are the kind of person who will definitely pay off the outstanding balance on your credit card each month then it doesn’t really matter to you what the interest rate is because you will never have to pay it.
If this sounds like you, then the best type of card to opt for would be one with no annual fee, or maybe one that comes with a loyalty bonus, such as cashback.
Alternatively, if you think you are unlikely to clear the balance each month then your best bet would be to shop around for a card with low costs – particularly ones with a 0 per cent interest on balance transfers and purchases.
Because there are so many cards on offer, most providers have special offers to help recruit new customers. For example, this might be in the form of reduced rates for a limited period, 0 per cent for six months or 12-months interest free.
Do not be sucked in by these deals. Before you choose a credit card that has a special offer, look at the rates the card will revert to once the ‘special offer’ period is over.
Mortgages
The biggest loan that you are ever likely to take out is a mortgage. The amount you borrow usually means that a mortgage is a long-term commitment. Typically, you will repay it over 25 years, although you can arrange longer and shorter periods. Your mortgage is secured on your home. If you cannot repay it, your home may be at risk.
A repayment mortgage guarantees that you will repay the sum borrowed and the interest you owe. However, an interest-only mortgage will only repay the interest. You will need to save separately or have some other plan to repay the original sum borrowed.
There is a wide choice of loans. It is important to understand your options and the commitment you are undertaking. If you are not sure, a qualified mortgage adviser or broker may be able to help.
