Transcript
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. But without carefully managing it, borrowing can carry big costs.
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 today and spend it later? What is the lowest sum I could borrow to meet the need I have? 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 amount before you take on 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.
You need to know where you’ll get the money for the monthly repayments, before you take it on. And how quickly will you 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’s calculated as the percentage paid back on every pound borrowed.
Broadly speaking, the longer it takes to pay off the loan, 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. If you miss the mark with this, 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 even 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 I need to repay? How long will it take? And what impact will this extra cost have on my everyday life? If you must take on debt, the best way to borrow is to do your research. Try to shop around and compare lenders to find the lowest interest rate available.
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