Category: Lending

Lending

How to Decide how much to Borrow

When you have decided that you will get a loan then it is really important, not only to get the right loan at the right price but also decide how much you should borrow. It is really important to get the amount that you borrow right as it could have a significant impact on the cost of the loan and possibly the term as well.

It can be tempting to think that you will borrow a little bit more than you need, perhaps so that you can treat yourselves or you will have a bit of money to fall back on if you need it in the future. Although this is completely understandable it is wise to not do this if you can help it. Borrowing money is expensive and if you borrow for a long time it can be incredibly expensive. It is worth calculating how much it will cost to borrow each £100 for the time that your loan lasts so that you can work out just how much it will cost you if you choose to have a bit extra.

It is therefore wise to carefully calculate how much money you need. You do not want to borrow too much because you will end up paying a lot for it. Therefore you need to find out how much you need as a bare minimum and use that. This could be less than you think, if you are very careful.

For example, if you are borrowing to pay for a car, you may think that you will need to borrow the full value of the car. However, you may be able to borrow less than this. Firstly, check to see whether you have any savings. You may feel that it is important to have savings to fall back on, but you will save a lot of money if you use these to pay with things rather than borrowing. It may not even take you that long to save up again, particularly if your loan repayments are smaller and you pay them for less time. If you look at how much in interest you are getting on your savings, chances are that it is a lot less than you will be paying for the loan. It is worth checking.

It may also be worth seeing whether you can find money elsewhere to use instead of borrowing. Perhaps you could sell things that you own and no longer need, do some extra work perhaps overtime or an extra job and earn the money that you need. It may seem rather extreme, but if you calculate how much it will cost you to borrow the money you may decide that it will be worth it. It can sometimes be difficult to weigh up the costs against the pleasure of having new items, but it is worth considering the repayments and the time it takes to repay as well as the cost and thinking about whether it really is worth it. If you do still think so then you need to make sure that you borrow the minimum amount possible so that you keep the costs to a minimum. Also try to find the cheapest loan so that you do not pay more interest than necessary.

It is good to think about whether you really need the money right away or whether you can manage to wait until you have time to save some up. This could allow you to borrow less or not to borrow at all. If you can borrow less then you will save money and you will save even more money if you do not have to borrow anything at all. Borrowing should only be done for emergencies that you will not be able to afford otherwise. If you borrow unnecessarily then it will cost you a lot of money and you may not even really need the money. Make sure that you think hard about why you are borrowing, whether you really need to and how much you need. Calculating the costs and the repayment amounts should help you to decide whether you think that it is really worth the extra cost or whether you can wait and save up or go without so that you can save the money.