Getting ready to borrow

A loan or credit card can help you spread the cost of big-ticket items or cover an unexpected emergency, like your boiler breaking down. 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 spread the cost of big-ticket items or cover an unexpected emergency, like your boiler breaking down. 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 11 OCTOBER 2021

Can you afford to borrow? 

The first thing to think about before you apply for any type of credit is whether you can afford the repayments. Don’t forget, committing yourself to loan or credit card repayments will leave you with less money to spend each month.  

The last thing you want is to overstretch yourself by taking on too much debt. So make sure your income and outgoings leave room for repayments and think about how much you can realistically afford to spend on them each month. Give yourself some leeway in case something changes, like a drop in income. 

Remember, a loan might not be the best option for you. Another option could be to save up for what you want. 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 and personal loans are the most common ways to borrow money, but there are big differences in how they work. Which product is best for you will depend on several things, including what you want the money for and how much you’re planning to borrow. 

Personal loan: this type of borrowing is often used for life’s bigger expenses, like buying a car or renovating your home. You borrow a set amount of money upfront and usually pay it back in fixed monthly instalments (with interest) over an agreed period of time, for example five years. There might also be a minimum amount you can borrow. 

Credit card: this type of borrowing tends to be used for expensive or emergency purchases, like a new boiler or replacement tyre for your car. Unlike with a debit card, the money doesn’t come straight out your bank account. 

Instead, you receive a statement from your credit card provider every month telling you how much you owe. You can either pay off the balance in full or make at least the minimum payment. If you don’t repay in full, you’ll usually be charged interest, which can soon mount up.  

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

Do you understand APR and other borrowing costs? 

Before you take out any kind of loan, you need to know how much it could cost you overall. Once you’ve worked this out, you can compare loans to find the right deal for you. 

To get an idea of how much a loan or credit card will cost, you need to look at the representative APR (annual percentage rate).  

The APR is the amount of interest you’ll have to pay on your loan or credit card, plus any standard charges. The APR doesn’t include non-standard charges, like those for late payments, so check these too when you compare. 
It’s important to bear in mind that the representative APR you see advertised only has to be offered to 51% of successful applicants. That means the other 49% could be offered a higher rate. You won’t find out your ‘actual’ APR until you’ve applied for the loan or credit card.   

Some loans have guaranteed APR, which can sometimes be higher than the representative rates you’ll see, but accurately shows what you’ll have to pay. 

How long do you want to borrow for? 

The length of your loan can affect how much interest you’ll pay. If you choose to repay yours over a longer period, you’ll pay less each month, but your loan could well cost more overall because of accumulated interest charges. 
If you’re worried about interest rates, another option may be to take advantage of 0% credit cards. These give you an interest-free introductory period so can be good for paying off expensive purchases. 

But, be warned – if you don’t make the minimum monthly repayments or pay back the whole amount before the interest-free deal ends, you could be hit with high interest rates. 

Do you already have loans or credit cards?

When deciding whether to give you a loan, lenders will look at your debt-to-income ratio. In other words, how much of your income goes on debt repayments. If this amount is too high, lenders might think you’ll struggle with extra loan repayments. 

It’s useful to work out your debt-to-income ratio yourself – not just for loan applications, but to see if you can really afford to borrow. 
To do this, simply divide your monthly debt payments by your monthly income, then multiply this figure by 100 to get a percentage. Anything less than 40% is typically acceptable to lenders, but the lower the better. 

Are you eligible for a credit card or loan? 

When deciding what kind of loan – if any – to offer you, lenders also look at your credit history, also known as your credit record or report.  

Your credit history is a summary of how you’ve managed credit in the past. If you have a bad credit record, you’ll find your choice of loans or credit cards is more limited. 

Before you start making applications for credit, it could be worth checking your credit report. You can do this through the three main credit reference agencies (CRAs): Experian, Equifax and TransUnion. If you have a poor credit score or you want to know how to improve your rating, read our guide on how to build your credit score for some helpful tips and advice.  

We’ve partnered with Experian to provide access to your Experian credit score for free in the Meerkat app.  
Applying for too much credit within a short space of time will hurt your credit score and make lenders more wary about letting you borrow, as it can look like you’re desperate for money. So make sure your application is likely to be accepted before you begin.  
You can use our credit card eligibility checker and our loan eligibility checker to show which cards and loans you’re likely to be accepted for, without impacting your credit score. 
Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility. 

Are there other ways to borrow?

As well as credit cards and personal loans, it might be worth considering these options to find the one that’s best suited to your circumstances. 

  • Overdraft: this is designed for short-term borrowing and allows you to borrow money through your current account. It can be a convenient way of accessing extra money when you need it quickly, but interest rates can be high. 
  • Car finance: this is a type of loan that’s specifically used to buy a car from a dealer, without having to pay for it upfront. 
  • Friends or family: asking to borrow money from someone close to you could be your cheapest option, but you run the risk of damaging your relationship if you fail to pay them back.  

Have you shopped around?

You’ll find a wide choice of loans and credit cards available, so you don’t have to go for the first one you see. Instead, arm yourself with as much information as possible and compare your options. 

Tips for borrowing money

If you’re thinking of taking on a loan or credit card, here are some key points to consider: 

  • Never borrow money on a whim. Always think hard about how much you need and why. 
  • When comparing loans or credit cards, check the total amount you’ll need to pay back. You may find that a shorter repayment period works out cheaper than a low APR.
  • Know the difference between secured loans and unsecured loans. Personal loans are unsecured because you don’t have to put anything up as collateral. A secured loan could see you lose your house if you don’t keep up your repayments.
  • Be wary of borrowing more money to pay off existing debts – you risk getting into more debt. If you’re in difficulties, you can find free debt advice from MoneyHelper.
  • If you go for an interest-free deal, make sure you can pay off the debt within the specified time period. Otherwise you could find you’re landed with extremely high interest rates. 

Frequently asked questions

Can I take payment holidays on loans and credit cards?

Some lenders offer what seem like generous payment holidays, giving you a break from repayments. But be aware that you’ll still have to pay back what you owe and interest may continue to mount up during the break, so your repayments may be bigger when they restart. Plus, you could end up paying more overall. 

Is it worth getting payment protection insurance?

If you’re thinking about getting payment protection insurance, always check the policy carefully. Some won’t pay out if, for instance, you’re self-employed, a pensioner or have certain health conditions.  

How much of my credit card do I need to pay off?

Always try to pay off more than the minimum each month – otherwise you’ll never get rid of your debt.  

Can I pay off my loan early?

Making overpayments on your loan can help you pay back what you owe quicker and save you money in interest payments. But there may be an early repayment charge, so be sure to check your loan agreement before you do this. 

Should I ever get a payday loan?

Short-term or payday loans are quick and easy to apply for online. But they usually come with eye-wateringly high APRs. It’s best to avoid taking out a payday loan because the costs can soon spiral out of control if you’re not careful. 

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