3 Things to Keep in Mind When You Borrow Money

by Alex Feldman

February 26, 2020

There are several reasons throughout life when it might become necessary to borrow a large lump sum of money. Maybe you need help putting down a deposit on your first home, or perhaps you need a bit of help funding your university degree. Whatever the situation in which you find yourself might be, there are a few things to keep in mind when you plan to borrow money.

1. Your Repayment Schedule

For first time borrowers, the concept of a repayment schedule might be a tough one to wrap your mind around. After all, you just received a large amount of money and are breathing a bit easier as a result. What could go wrong? Unfortunately, that money isn’t yours and needs to be returned to its owner in due time.

You need to understand the repayment plan before you agree to it fully. Is the timeline in place realistic for your circumstances, or do you need to negotiate a longer one? Will you potentially be able to pay the loan back in a shorter amount of time, thus cutting down on the amount that you will pay in interest? If you are involved in a family lending scenario, it is even more important to know what is expected of you in regards to the repayment of your loan; because you are related it does not mean that you should treat it any less seriously than if you were borrowing from a company.

2. The Interest Rate

In broad terms, an interest rate is essentially the amount that you are charged to borrow money. This amount is factored into your regular payments as a percentage of the overall amount that you will be paying. For example, if you borrow £1000 at an interest rate of 5%, then you would end up paying £50 in interest.

Usually, the interest rate that you receive from a lender is based on your financial standing. If you have a good credit score and a good regular income, then you should be able to get a low-interest rate. This is because the lender knows that they have a greater chance of receiving their money back from someone who demonstrates fiscal responsibility. 

A low credit score, coupled with a substantial amount of debt in your name, will result in your receiving a high-interest rate. This means that you will be paying more to borrow the money you need overall.

3. The Impact on Your Budget

If you are already financially independent, then it is likely that you already have a monthly budget in place. It is important to bear in mind, then, that adding in a regular payment for a loan can massively disrupt that budget. 

To avoid falling behind on your other payments, like utilities, for example, you should take some time before taking out a loan to evaluate your monthly expenses. Are there certain areas that you can cut back on? If so, you might even be able to negate the need to take out a loan entirely.