Managing Debt

A Sense for Money

Last week, we looked at debts as well as interest rates and how different lenders charge different interest. We also saw how no debts were good, but that some debts were better than others. This week we will look at the questions you should ask before you borrow any money from a lender.

There are many reasons for borrowing money. Whatever these reasons are, always ask the following questions before committing to borrowing any amount of money.

• Do I really need the money now? Are you able to wait a little longer until you can save up enough money to avoid getting into debt at all?

• How much will the borrowing cost me to pay back in total? When you’ve made all the monthly payments, how much will you have paid back to the lender — you may be shocked by the amount!

• How much will it cost me to finance the debt? Are your regular repayments of the debt and the interest going to be more than you can afford? What would happen if, for example, you have an accident and cannot work?

• What is the interest rate payable and how does this compare with other lenders? Usually, it’s better to have the lowest interest rate, as some lenders may be less expensive than others. Shop around and find the best deal for you.

• What other sources could I borrow the money from and would they be cheaper or better? An overdraft or loan from a bank is often cheaper than borrowing the same amount from the same bank on a credit card, and both are usually far cheaper than a loan shark. Ask your questions before you sign up.

• What security do I have to offer to borrow the money? Often, and almost always for larger amounts, the lender will want to have some security, an asset of yours they can take away from you to sell if you cannot repay the money. If that security is your house or your transportation, is it worth the risk to borrow the money at all?

• What are the penalties if I cannot make a payment? Everyone has bad luck, and if your temporary bad luck means your interest rate increases or you have to make a penalty payment, find out if alternative lenders are more forgiving.

Now that you’ve had your questions answered from a range of possible lenders and have confirmed to yourself that you really do need to borrow the money; you’re in a better position to make a choice of who to borrow from. Write the answers down on paper so you can see which lender offers the most flexibility, who will cost you the most and who costs the least. Now you can make an informed choice and select the best option for you and your family.

If you already have debts, it’s worthwhile to ask the above questions to your existing lender and compare them with others. Maybe you could switch your expensive credit-card borrowings to a cheaper loan from your bank or another bank? Maybe another credit card has a cheaper interest rate or a “special offer” rate for new customers you could take advantage of.

If you are stuck with debts, you should concentrate on paying off the most expensive debts first, or those with the highest interest rates, as the money you will save on these high rates can be used to repay all your debts that much faster.

A word of caution: We have seen people take a loan from their bank at a low interest rate to pay off the debts on their credit cards. This is generally a good thing as they have lowered the interest rate on their debt and can reduce the debt quicker, or make lower repayments every month. But instead of locking their credit cards away until the debt is repaid, they continue spending only to build up another debt on their credit card — so they now owe even more money.
 
Just remember, taking on debt is a serious decision and you should always be in a situation where you can control your debt. If you cannot control your debt, then it will most certainly control you.