Borrowing: a basic guide

When you become a dad for the first time, the chances are that you will be facing many new demands on your finances. It is possible that you may need to either borrow money or re-arrange existing credit agreements.

Here are a few ways of getting credit, with their good and bad points.

Remortgage

You increase the mortgage by adding to it whatever extra money you need.

Pluses:

  • they are relatively affordable because the interest charged on a mortgage is often cheaper than a loan or a credit card
  • you are bringing all your debts under one roof, making them easier to manage

Minuses:

  • your home is at risk if you do not make regular payments
  • you will end up paying more interest on the debt because the repayment period lasts longer

Remortgaging: a basic guide

Personal loans

Pluses:

  • you can set the repayment period to meet your financial needs
  • your home is not at risk if you d not make monthly payments

Minuses:

  • interest rates can be high – and many people find they are higher than advertised
  • being rejected for a personal loan can leave a negative “footprint” in your credit reference file

    Overdrafts

    Pluses:

  • they are an easy way to access money, available only if you need it
  • the interest charged applies only to the period the money is owed, making them flexible

Minuses:

• the interest charges can be high

• it is easy to slip into an unauthorised overdraft and incur even more punitive charges

Credit cards

Pluses:

  • you can make use of as much or as little of a card’s available debt as you want
  • you can determine repayment amounts
  • interest is charged only on what you owe
  • 0 per cent credit cards offer the opportunity to cut the interest you owe

Minuses:

  • it is too easy to keep spending with your card, rather than just using to repay debt
  • after a 0 per cent interest-free period, the rate usually goes up to at least 15 per cent
  • minimum repayments will extent the debt period, up to 20 years in some cases
  • incredibly complicated charging methods mean many cards are much more expensive that people assume

Tips when obtaining credit

If you are looking to borrow money, here are a few tips.

  • Try not to apply too many times, as each time you do you may leave a footprint in your credit records. Other lenders will wonder why you have been rejected.
  • It can sometimes make sense to borrow a little more than you need: some lenders operate cut-off points where the interest charged falls the more you borrow. But be careful.
  • If you are taking out any credit card to refinance debts, make sure you don’t also use the card and build up even more. Cutting it up is a good idea.
  • Always ask yourself if you really need the money before you borrow more: aim to keep regular payments on outstanding loans and credit agreements for no more than 10 per cent of your net monthly income – or 40 per cent if your mortgage is included.
  • If you are in bad debt, get advice
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Guest Tuesday, 19 February 2019

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