Planning a big purchase or need some extra cash to get you to payday? Before you sign up for a credit card, bank loan or store card, or add to an existing card or loan it makes sense to think about whether you really need to borrow money. At times like this – with economic uncertainty and rising bills – many people are now choosing to pay back money they’ve already borrowed rather than borrow more.

Stay MoneyFit and find out what you need to think about when borrowing money.

Deciding whether to borrow

There are some very important questions you need to answer before you borrow money. You should ask yourself if

  • you need to spend the money
  • you have other ways of financing the purchase, and
  • you can afford to pay back the money you’re planning to borrow.

Do you really need to spend the money at all?

Money fitness tip

If you can wait and save up for a purchase, instead of using credit, it will cost you far less, as you won't have to pay any interest.

Some people who borrow money do so either without thinking if they can really afford it, because they feel they have no other option, but that often isn’t the case. It may be that you could put off making the purchase or not make it at all. Try asking yourself:

  • Could I wait until I can afford to buy the item without borrowing?
  • If there’s something I need, is there another way of getting it (for example, swapping it for something else, buying it second-hand or getting it for free from a free recycling website)?

Can you save up or use some savings instead of borrowing money?

If you really don't need to spend the money today, then you should seriously consider saving some money each month rather than getting into debt. 

If you can wait and save up for a purchase, instead of using credit, it will cost you far less (unless you qualify for a 0% credit card deal), as you won’t have to pay any interest. It might also have been reduced in a sale or if it’s technology, upgraded to a better model.

For example, if you wanted to buy something that cost £600:

Saving before you spend
If you don’t have any savings, but can save, for example, £50 a month, it would take you a year to save the £600 and you would have earned interest on top of this. 

Cashing in savings
If you used the money from your savings account; assuming your savings earned 1.5% a year, you would lose a maximum of £9 in interest if it took you a year to save the £600 again.

That means spending £600 from your savings would ‘cost’ you a maximum of £609 by the time you’ve added in the lost interest.

Using a credit card
If you paid the £600 by credit card, charging an average interest rate of 17%, and if you paid the debt back at a rate of £50 a month, it would take you 14 months to repay the debt and would cost you £58 in interest.

That means you’d be £49 (£58-£9) worse off by paying on your credit card, rather than cashing in your savings.

See Deciding when to borrow to find out the difference between good and bad debt.

If you do decide you want to borrow

If you definitely want to borrow some money and you are sure you can repay it, there are a number of important factors to consider.

How much can you afford to repay?

It's very important to work out how much you can afford to repay each month, as this will affect which borrowing option is best for you. 

Money fitness tip

Use our Budget planner to work out how much you can afford to borrow. 

Make sure you are realistic about how much you could pay if your mortgage or rent went up, if you had to spend more on things like energy bills or if your pay was cut.

Choosing the right type of credit

You should also make sure you choose the right type of credit or loan for your situation. Otherwise you could find yourself paying more than you need to. 

Shop around and compare deals looking at the interest rate and APR, how much you will repay in total, any penalties for missed or late payments, and the cost per week or month and whether this might vary.

Not all credit options are good or safe. If you have a poor credit rating then you may be tempted to use a doorstep lender or a payday loan company. However, these are expensive and should be avoided for anything more than a few days if possible. See Deciding on the best type of credit for your options.

Last reviewed: 16/01/2019