Factors to consider

Learning about the problems debt can pose to your personal finances is key to making your money work.

Debt can have a big impact on your finances now and in the future. While we all probably know that it’s not free money, there are times when it might be convenient or necessary to borrow money.

In the armed forces community, serving, deployments, postings, leaving service or supporting a household can all create moments where borrowing might feel useful or necessary. But without carefully managing it, borrowing can carry big costs.

Understanding how debt works helps you make confident, informed decisions and stay in control. Remember that when you take on debt – you’re borrowing money that isn’t yours. There’s almost always a charge for this.

Loans carry cost in the form of interest – this is the fee lenders charge borrowers and these fees can vary widely. Try to ask yourself these questions before borrowing money:

Could I save this money instead, and spend it later? And what is the lowest amount I actually need to borrow? This is especially important because lenders will sometimes offer you more than you asked for –  which can be tempting, but is actually more expensive in the long run.

When you borrow money, there are two key things to consider: the monthly repayment amount and the interest rate.

Be sure to look closely at the repayment amounts before you take on any debt – ask yourself if you can afford these repayments, not just in the early part of the loan, but until the whole lot is paid off. Don’t forget the reason why you needed to borrow, the last thing you want is the situation to repeat itself and have to take on avoidable debt.

You need to know where you will get the money for the monthly repayments before you take it on. And how quickly you will be able to pay it back. The time you choose or are given to pay back a loan is called the term.

This is where the interest rate comes in – it is calculated as the percentage paid back on every pound borrowed. Broadly speaking, the longer it takes to pay the loan off, the longer the term, the more interest that you have to pay.

Affordability (the interest and whether you can hit those monthly repayment amounts) really matters. Miss the mark with this and you can end up borrowing more to cover your debts, and this is how debts can build up quickly.

–

Problem debt often builds when the payments you make don’t reduce the amount you owe. Even if you pay a bit more than the minimum, you might only be covering interest, not reducing the actual debt. Over time, this means you’re paying out money every month, but the total you owe barely moves or can even increase.

Before you borrow, think “How much will l need to repay? How long will it take? And what impact will this extra cost have on my everyday life?”.

For example, if taking out a loan means repayments of £500 a month for three years, how likely are you to manage that without creating extra pressure in daily life?

If you must take on debt, before borrowing, you should do your research – try to shop around and compare lenders to find the lowest interest rate available.

Borrowing can be helpful – but it’s only helpful when it’s affordable and intentional. Be clear on the cost, the time it will take to repay, and how the repayments fit into your real life, so you stay in control.

You might also want to watch our video on needs versus wants, which looks at how to prioritise what you spend your money on.