Getting ready to borrow

A loan or credit card can help you get the things you want or need without paying everything up front. But is borrowing right for you? Here are some questions to ask yourself before you take the plunge.

A loan or credit card can help you get the things you want or need without paying everything up front. But is borrowing right for you? Here are some questions to ask yourself before you take the plunge.

Anelda Knoesen
From the Money team
minute read
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Posted 7 OCTOBER 2019

Can you afford to borrow?

Loan or credit card repayments will impact your budget. So check that your monthly income and existing outgoings leave room for the repayments and, if so, how much they could realistically be. Give yourself some headroom in case something changes – your bills going up, for example.

Saving for what you want to buy may be an option – it’s worth comparing savings accounts and ISAs to find one with competitive rates.

Do you want a loan or a credit card?

Credit cards can be used for regular or repeated spending; with a personal loan, you borrow a set amount of money upfront. A loan may be the only option if you want to borrow a large sum of money.

There are different types of credit cards and loans, so understand what each of them offer before you apply.

Do you understand APR and the other costs of borrowing?

Before you borrow, you’ll need to know how much a loan or credit card could cost you. Once you know this, you can compare to find the right deal for you.

Lenders use representative APR (annual percentage rate) to illustrate what a loan or credit card could cost you. You can use this figure to compare deals.

APR includes the percentage rate of interest you have to pay on the loan or credit card as well as standard charges. It doesn’t include non-standard charges, such as those for late payments, so it’s useful to look at these as well when you compare.

How long do you want to borrow for?

This can make a difference to how much interest you’ll pay. You may be able to take advantage of credit cards that offer a period of 0% interest on purchases. But if you don’t make the minimum monthly repayments and pay back the whole sum before the deal ends, you could be hit with a high rate of interest.

Personal loans offer set repayment periods. Repayments may be smaller if you choose a longer period, but the total cost of the loan could be higher overall.

Do you already have loans or credit cards?

Lenders will look at your debt-to-income ratio when deciding whether to lend to you. This is the percentage of your income that goes on debt repayments each month. If it’s too high, lenders might consider that you’d struggle to take on any further loans.

It’s useful to work out your debt-to-income ratio yourself – not just for the sake of applications but to see if you can really afford to borrow.

Are you eligible for a credit card or loan?

Lenders look at your credit history, also known as your credit report, when deciding whether to lend to you and the deals they’ll offer. Your credit history is a summary of how you’ve managed credit in the past. A poor credit record will limit your choice of loans or credit cards.

Before you start making applications, it may be a good idea to check your credit report. You can do this via the three main credit agencies: Experian, Equifax and TransUnion.

Applications for loans and credit cards can leave a footprint on your credit report, so it’s good to get an idea of whether your application is likely to be accepted before you begin. Alternatively, use something that does a soft search (this doesn’t leave a footprint), such as our credit card eligibility check tool.

Have you shopped around?

There’s a wide choice of deals available, so don’t go for the first one you see. Arm yourself with as much information as possible and compare your options.

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