A guide to borrowing the right amount of money

Sometimes needs must and borrowing money is the only answer, whether it’s for car repairs or to replace a boiler that’s finally given up. But when it comes to how much to borrow, don’t just pluck a number from the air – taking out a loan, or borrowing money on a credit card, needs to be carefully planned.

Sometimes needs must and borrowing money is the only answer, whether it’s for car repairs or to replace a boiler that’s finally given up. But when it comes to how much to borrow, don’t just pluck a number from the air – taking out a loan, or borrowing money on a credit card, needs to be carefully planned.

Anelda Knoesen
From the Money team
3
minute read
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Posted 29 SEPTEMBER 2021

How much do I need to borrow?

Think about why you need the money – don’t guesstimate the cost of repairs or how much that wedding will cost – make sure you get quotes or create a budget. 

Being focussed on how you’re using the money means you’re more likely to use it as planned (rather than blowing it on a no-expense spared weekend away).

Why it’s important to consider how much money you need 

Knowing how much you need to borrow will help you decide where best to find that extra cash injection. 

  • If you only need to borrow a small amount of money for a very short time, consider using your interest-free overdraft, if you have one. If not, it could be worth looking at different current accounts that offer this facility.
  • Credit cards with 0% interest on purchases could be worth a look, particularly if you need to buy something specific. As long as you pay back what you owe within the interest-free period (and make at least the minimum monthly payments on time), you can be smug in the knowledge that the credit hasn’t cost you a single penny extra. 

If you need a larger sum of money, a personal loan could be the answer. You can usually opt to borrow a minimum of £1,000, with upper limits depending on the lender. Most will lend you up to £25,000, although some may go as high as £50,000. 

The best APRs (annual percentage rate – this is the amount of interest, plus any fees, you pay on top of your loan) are reserved for customers with the best credit ratings. That’s why when you apply for a loan, you need to know that the APR you see might not be the one you get, unless it’s labelled as a guaranteed rate.

Should I get a loan? 

There are lots of reasons people take out personal loans. Here are some of the common ones: 

Emergencies 

If you have an unexpected expense, like your boiler breaking down, you may need to access cash, fast. A personal loan can be a way of doing this. 

Financing a car 

In the market for a new car? Taking out a personal loan can be a useful way to finance it.  

Home improvements 

It can make sense to borrow money to renovate your home, especially if it adds value to your house. 

Consolidating debt 

If you’re paying high interest rates on credit cards, you may find that consolidating your debt into one personal loan can leave you with a more manageable monthly payment. Be aware, though, that paying off your debt over a longer period may mean you pay more interest overall. You might also have to pay early repayment charges on the loans you’re consolidating.

What happens if I borrow too much? 

Borrowing more than you need might sound like a great idea (think of all the fun stuff you could do with the extra cash), but the reality is you’ll have to pay it all back, plus interest. 

Borrowing more means that either: 

  • Your monthly repayments will increase
  • You’ll be in debt for longer.  

We know you can’t see into the future, but consider what might happen if you lost your job or had to take a wage cut. You’ll still need to make those loan repayments whatever life throws at you – so overstretching your finances might not be the wisest decision.

What happens if I borrow too little? 

On the flip side, borrowing too little can be as short-sighted as borrowing too much. If you don’t borrow enough to cover your needs, you might be tempted to find more money elsewhere, perhaps taking out another loan or credit card. This means juggling more payments and potentially getting into a tricky situation. 

Applying for loans and credit cards will also leave a footprint on your credit history. Applying for lots of loans could make you look desperate in the eyes of lenders and they might refuse to offer you finance.

Getting the balance right 

The trick is to be objective about how you’re going to use the extra money and stick to it. Once you’ve budgeted how much you can realistically pay back each month (giving yourself a buffer for those ‘just in case’ moments), you can look at the best way to raise the money you need. 

See how much you could afford to borrow with our loan calculator

And to help you further, we’ve put together some handy bedtime reading on credit cards, loans and current accounts. So what are you waiting for? Grab that cocoa, hunker down and take control of your finances. 

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 availability.

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