Read this before you borrow money!
If you’re looking to get a great deal on a credit card or loan, make sure you consider these four crucial questions before applying...
Not too long ago, in an era that now feels far away, it seemed simple to borrow money.
Banks gave out mortgages that were larger than the value of the people’s properties, and it was easy to obtain a deck of credit cards with sky-high limits.
The credit crunch has changed all that. Getting credit is now more difficult than it was before the downturn, and there’s been a shift in attitudes towards debt.
If you need to borrow – but are looking to do so cheaply and responsibly – here are the four basic questions you should ask yourself.
1. How good is my credit history?Your credit history is information about your past borrowing behaviour.
Every time you apply to borrow, your credit history will be assessed by the lender you have chosen so they can decide whether to offer you a loan, credit card, overdraft or mortgage.
Since the credit crunch, banks have been stricter than ever when it comes to scrutinising people’s pasts. Therefore, it’s important to get a copy of your credit file and look carefully at what it contains before you make any application to borrow. (Find out How to improve your credit rating.)
If you’ve made mistakes with credit in the past, be aware that this might affect your ability to get a market-leading credit card or loan today. The best 0% purchases credit cards, for instance, may be difficult for you to get if there are blemishes on your credit history.
Remember, applying for a financial product you do not get could further damage the chances you’ll be able to borrow. Every application for credit will leave a ‘footprint’ on your file which is visible to other lenders – so think about whether you’re likely to be approved for a loan or credit card before you apply.
2. How much do I need to borrow?Before you apply for any form of credit, you need to decide how much you’re looking to borrow.
In the past, some companies used TV advertising to suggest that customers could borrow ‘extra’ cash when applying for loans – perhaps to fund holidays or home improvements.
In my view, it’s a terrible idea to borrow more than you actually need to – no matter how easy it might seem to add an extra £1,000 to your loan amount or credit card balance.
That’s because you’ll have to pay interest on every penny you borrow from a bank or credit card provider – and the more you borrow, the more you will have to pay for the privilege.
3. How long will I need to repay my debt?Once you know how much you need to borrow, the next step is to consider what monthly repayments you can afford and how long you’ll need to pay off your debt in full.
It’s important to be realistic when budgeting for your monthly repayments. If you set them too high, you may over-stretch your finances and find you’re driven into more debt later down the line.
On the other hand, it’s vital to ensure you don’t take longer than is necessary to repay your debt.
Remember, the longer it takes you to completely clear a loan or credit card balance, the more time you’ll spend paying interest – and the more your debt will cost you overall.
It’s also important to consider whether you’ll be better off committing to a structured repayment plan for your debt, or with the option to pay it down in a way that is flexible.
If you’d prefer a regimented approach to repayment, a personal loan might work for you. On the other hand, you may feel you’re disciplined enough to take charge of your own repayments – so borrowing on the right kind of credit card could be a smart move.
4. What’s the best way for me to borrow?Once you’ve answered the three key questions above, it’s time to work out which kind of borrowing is right for you.
I believe most borrowers should think about the three options below before considering a secured loan or an extension on their mortgage.
Bear in mind that the table below isn’t intended to provide a definitive judgement on which kind of credit could suit you. Rather, it’s designed to get you thinking about the different options available and which of them might be appropriate.
| Option | Advantages | Disadvantages | Product picks |
| 0% purchases credit card | Allows interest free borrowing for a finite period after the card is first taken out. Allows flexible repayments above a minimum required level (typically 2-3% of the total card balance). | Will charge a high rate of interest after the introductory 0% purchases period ends. Borrowers must clear their balances in full within the time limit set in order to avoid charges – so may not be suitable for those who need to borrow larger sums. Applicants are likely to need a very good credit history. | The Tesco Credit Card currently offers 0% on new purchases for 12 months. Alternatively, the BT Retail Card offers a 10 month interest free period on new purchases. |
| Long term, low rate credit card | Allows borrowing at a low rate of interest for either a set period of time or until the purchases made on the card are paid off in full. Allows flexible repayments above a minimum required level (typically 2-3% of the total card balance). | Depending on which card you choose, the interest rate charged may be variable and could therefore increase. Borrowers can’t apply for a specific credit limit, so you may find you are not offered the right amount for your needs. | The Barclaycard Simplicity Visa currently offers a low rate of 6.8% APR on both new purchases and balance transfers. |
| Personal loan | Usually allows borrowing at a fixed rate of interest for an agreed period of time. Borrowers are required to commit to a repayment schedule and know exactly when their whole debt will be paid off. Borrowers can apply to borrow a specific sum at a rate and over a period of time to suit them. | Repayments are not flexible. The same sum must be paid off each month or you may face charges and negatively affect your credit rating. Interest rates on personal loans tend to be higher than on 0% purchases and long term, low rate credit cards. Interest rates on larger loan amounts (generally £7,000 and above) tend to be the most competitive. | Right now Alliance & Leicester is offering a market-leading personal loan rate of 7.9% APR on loans of £7,500 to £15,000. |
Remember, no two borrowers are likely to have identical requirements – so think carefully and research a range of deals before signing on the dotted line.
You can read more about both 0% purchases credit cards and personal loans here on BeatThatQuote.com.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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