Is it better to borrow or save, and what will it cost me?
You can buy a car on instalment terms, use a credit card to buy clothes, take out a loan to pay for a holiday, or a mortgage to buy a house. But never forget: if you borrow money, you have to repay it sooner or later, and you will pay back more than you borrowed in the first place.
Before you borrow, or use your credit card, always ask yourself the following:
- Do I really need this item?
- How much do I already owe?
- How much extra will all of these repayments really cost me?
- Can I really afford this?
Use a budget planner to see how much you are already spending and what you've got coming in. Do remember to also leave a margin for emergencies. Put this in an account where you have easy access to it. If you really can't afford to save, it's unlikely that you can afford to repay a new loan.
Be tough with yourself. You might want a new TV set, but will you really be able to keep up the monthly repayments? Try saving the amount of the monthly payment each month for a few months first. If this doesn't cause you any problems, you can probably afford the loan.
- Always keep track of what you've bought with your credit card
- Taking regular cash advances is generally not a good idea - it's still money you will have to repay and, if you use it to repay other loans, or to top up your salary, all you are doing is increasing your debt, which will not help you to get your finances in order
- Never use a loan or a credit card to repay the monthly repayments on other loans, or to meet regular household expenses if you regularly have no cash left
- If these kind of events happen regularly, your budget could get out of control and you must talk to your creditors about restructuring or refinancing your debts
Some people will save over time in order to buy the goods or build up the savings they need. The cost to these people is the time they have to wait until they have enough money to obtain what they want. Many ways of saving are available, from simple deposit accounts for easy access, to term investments for higher returns, and long-term pension savings.
Top tip: Always try to have some money set aside for the future. It will help if something unexpected happens. If you only have loans, it will be much harder to manage. If you have money left over each week or month, always aim to put some aside for savings for you and your family future emergencies. Aim for an emergency fund up to 6 months of your salary.
A bit of both
In most cases, people do a little of both, saving and borrowing for the things they want - this is certainly the best way of managing your financial affairs. The challenge is to get the balance right. And if you're going to borrow, you need to know how it works, and what it will cost you. This will help you to budget successfully.
What will borrowing actually cost me?
The price of the loan is the interest you have to pay on a monthly basis that will affect the amount of money that you have available at the end of the day. To compare the cost of different types of loans, look at the annual interest rates and any additional fees.
The annual interest rates -sometimes shown as an EIR (effective interest rate) - are a guide to the cost of the credit deal. As a general rule, if the period of the loan is the same, the lower the annual interest rate, the better the deal.
The longer you take to repay a loan or credit card, the more it will cost you in interest.
You should always aim to finish repaying a loan before you need to replace or pay again for what you have bought.
The price of the loan is the interest you have to pay. To compare the cost of different types of loans, look at the annual interest rates and any additional fees.
The annual interest rates are a guide to the cost of the credit deal. As a general rule, if the period of the loan is the same, the lower the annual interest rate, the better the deal.