The six biggest borrowing mistakes
If you need to borrow some money, don't fall foul of these six mistakes.
Borrowing money isn’t a decision that should be taken lightly. Whether you’re thinking about increasing your overdraft limit, hoping to apply for a new credit card, contemplating taking out a personal loan, or even choosing a mortgage, there are many aspects that you need to weigh up first. It really isn’t something that should be rushed.
So here, I’m going to reveal six mistakes to avoid when you’re thinking about borrowing.
1. Failing to check the interest rate
How much interest you’ll be paying on your borrowing is probably the most important aspect you need to consider. Yet despite this, a recent survey from myvouchercodes.co.uk revealed that more than half of the people questioned who had borrowed money were not aware of the interest rate involved before they agreed to the deal!
What’s more, once they did find out what the interest rate was, two-thirds claimed they felt ‘shocked’ by how much they were being charged. A fifth of respondents even admitted they regretted borrowing the money.
With credit card interest rates at a 13-year high, and loan interest rates at a ten-year high, I can’t stress enough how important it is to check the interest rate before you apply. Always ensure you shop around fully to get the very best deal possible, and look for interest-free deals where possible (for overdrafts and credit cards). You can easily do this through our comparison centre.
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You should also be aware that the advertised interest rate isn’t necessarily the rate you will receive. The advertised percentage rate (the APR) only has to be offered to 51% of successful applicants.
As a result, you may end up with a far higher rate of interest than expected. So always ensure you know exactly how much interest you’ll be paying out each month.
2. Borrowing more than you can afford
This is so easy to do. After all, if your lender suddenly offers you a bigger credit card limit, isn’t it tempting to simply accept and regard this as additional spending money?
Similarly, if you’re applying for a mortgage and the lender says it can offer you more money than you originally expected, you might start dreaming about that four bedroom house you could buy, instead of the two bedroom one you were initially thinking about.
Don’t get carried away – work out how much your monthly repayments would be and assess whether you really can afford it. Just because it’s offered to you, it doesn’t mean you should accept it.
3. Forgetting to read the terms and conditions
Let’s face it, ploughing through reams of small print is hardly the most thrilling of jobs. But if you fail to read it, you’re likely to miss out on some very important information.
Mortgages often have Early Repayment Charges that you'll have to hand over should you pay the mortgage off before the end of the initial promotional period, or even if you overpay by too much on your regular payments. These charges can come to thousands of pounds, too!
Meanwhile, you might not realise there’s a serious penalty if you go over your overdraft limit or that your fantastic interest-free credit card deal comes with a balance transfer fee of 3%.
So as boring as it is, always read the terms and conditions before signing on the dotted line.
4. Only paying back the minimum each month
Once you’ve received your credit card and spent rather a lot on it, don’t make the error of simply paying back the minimum each month. The minimum monthly repayment on a credit card is typically set at a low level, often as low as 2%. This means that if you’re only paying this off each month, it’ll take you a long time to clear the balance and you’ll end up forking out a lot more in interest.
So if you can afford to, try to pay off more than the minimum each month. Find out more in The credit card you’ll never pay off.
Some personal loan and mortgage providers will also allow you to overpay should you choose to, without charging a penalty. However, as I’ve said before, you should check the terms and conditions carefully as some lenders won’t allow this and others may set a limit on how much you can overpay by.
5. Missing payments
Whatever you do, don’t miss payments! If you miss a payment not only could this damage your credit rating, but if you have a promotional period on your credit card (perhaps you have a 0% on new purchases card), for example, there’s a good chance your lender will cancel it. So don’t do it.
Related how-to guide
How to destroy your credit card debt quickly and effectively.See the guide
If you have a habit of forgetting things, set up a direct debit to take the payment for you each month.
6. Resorting to desperate measures
Finally, if you do need to borrow money, don’t resort to desperate measures. By this, I mean turning to expensive borrowing such as payday loans, logbook loans, and even loan sharks.
Payday loans are cash advances on the salary you’re expecting at the end of the month and they can be incredibly quick and easy to apply for. You don’t even need to worry about a credit check. However, the APR on these loans can be as high as 2,000% - outrageously expensive.
And although the idea is that you only borrow the money for a month, lenders make it very easy for you to simply postpone your repayment for a second month or more, leaving the interest to stack up. Meanwhile, logbook loans are loans secured against your car. Again no credit checks are carried out. The loan company will lend you a percentage of the trade value of your vehicle, but will again charge you a high rate of interest – often in the region of 400% to 500%. What’s more, if you can’t meet your repayments, the lender can take possession of your car and sell it at auction.
Finally, loan sharks are an extremely risky and often dangerous way to borrow money – as well as an expensive one. So avoid them at all costs. Find out more about this – as well as some better ways to borrow - in Six dangerous ways to borrow.