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 it shouldn’t just be a question of plucking a number out of the air; taking out a loan or borrowing money on a credit card needs to be carefully planned. Think Goldilocks; too much and you’ll be in debt for ages, too little and you might end up juggling multiple repayments on numerous loans – you need to get it just right.

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How much do I need to borrow?

How long is a piece of string? The more you think about it, the more daunting the question seems. Think about what you actually need the money for – don’t guesstimate the cost of repairs or replacement of white goods; get quotes or know which items you want to buy. Being focussed on what you need the money for will also help you stay objective about using the extra cash (so you don’t suddenly decide to blow it all on an all-inclusive to sunnier shores).

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Why it’s important to think about how much you need

How much you need to borrow will help determine where you find that extra injection of cash and when it comes to how much you can actually borrow, well, much of that will depend on your own credit history.

So first things first – if you only need to borrow a small amount of money , consider your overdraft facility if you have one. If not then it could be worth looking around at different current accounts, with many banks offering better interest rates than on a loan or even interest free overdrafts if you switch.

Alternatively, credit cards with zero interest on purchases could be worth a look if you need to buy items (rather than need the actual cash). As long as you pay back what you owe within the interest free period (along with making the minimum monthly payments on time), then you can be smug in the knowledge that the credit hasn’t cost you a single penny extra.

But if you need a larger sum of money then 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 – some will loan out up to £50,000, but most around £25,000. The best APRs (annual percentage rate, which is the amount of interest plus any automatic fees you pay on top of your loan) are reserved for the customers with the best credit ratings, which is why when you apply for a loan, you need to be aware that the APR you see, might not be the one you get.

Danger, danger! Borrowing too much or too little

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 in reality don’t forget that you still have to pay it back plus interest. Borrowing more means your monthly repayments will increase or your loan period will be much longer – either way, it’s a big commitment to make.

We know you can’t see into the future but consider what might happen if you had to take a wage cut, or your outgoings suddenly increased. You’ll still need to make those loan repayments regardless of what life throws at you – so overstretching your finances with a massive loan probably isn’t the wisest decision you could make.

Of course, on the flip side, borrowing too little can be just as short-sighted. If you don’t borrow enough to cover your needs in the first place, you may be tempted to find more money elsewhere, perhaps another loan or taking out another credit card. Whilst it’ll give you a short term solution, it means juggling more payments and potentially getting into a pickle over it.

Applying for multiple loans and credit cards will also leave a footprint on your credit history. If you’re applying for lots of loans, it smacks of desperation which will mean lenders may be reluctant to loan to you.

Cash injection

The trick is to be objective about what you need the extra money for and stick to those reasons. When you’ve budgeted how much you could realistically pay back each month (giving yourself a bit of a buffer for those ‘just in case moments’) then you can start comparing the market for the best way to raise the money you need.

And just because we like to be helpful, 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 those finances.

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