When you are snowed under with regular letters informing you of your new overdraft charges, or what your minimum payment is on this month’s credit card bill, it can be all too tempting to borrow more money to pay off any arrears that are already outstanding.
While a loan with low monthly repayments may seem like an effective way of paying off debts, the true cost of borrowing may not always be as it seems. Before you go ahead and sign for a loan, take some time to assess your decision.
Is there anything else you can do?
Savings are important, they offer you a safety net and, depending on the kind of savings account you have, can even earn you extra money if the interest rate is decent. However, if you are essentially wasting money in other areas paying interest fees, then it makes much more sense to use what you have saved to get yourself out of the red. With regards to this, paying off your debts can actually save you more money than your savings can and once you are cleared and able to start afresh with your finances, saving will feel so much better!
Understand the ts&cs
The term APR can be confusing and, in turn, it may seem easier to sweep it under the carpet. It stands for ‘annual percentage rate of charge’ and is inclusive of charges and arrangement fees. Having knowledge of this is so beneficial when choosing a loan or credit card as you can compare the APR between the different products and know which is going to cost you less to have. Although it usually works that the lower the APR, the lower the cost is to use the service, make sure you really read the small print.
Again, when looking for the best deal, make sure to take into account any fees, such as late payment, default or settlement. They may not always be advertised alongside the offer, but are important to know as they can affect the amount you have to pay if applied.
Borrowing a large amount of money may seem an ideal way to get you back on the straight and narrow financially, but it isn’t really the best idea. At the end of the day, you have to pay said amount back and interest that can build up may end up being more than you are paying at the moment. Go through your incomings and work out what you can afford to pay back. Once you see what you can actually afford to pay off comfortably, you will have your answer to how much you should borrow. It’s important to be able to budget to know realistically how much you can pay back and it will help keep you focused.
Time is of the essence
Having a date in mind to be debt-free by can be encouraging and also lets you see the light at the end of the tunnel. Taking out a loan that is of a longer-term with lower monthly repayments may be appealing, but the reality is that you are essentially in debt for longer and the amount you pay back will actually be higher. If you are in a position where you can take out a short-term loan, then this would be the most recommended path to follow.
When keeping time in mind, it’s also worth noting that you should pay more than the minimum payment if possible. Again, this will shorten the amount of time it takes to pay off your borrowings and, in the long run, means you are paying back less.