Understanding your Borrowing Options

Most people require some form of credit at some point in their lives. Whether you use credit cards for unexpected purchases, have a mortgage or need money for …

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Most people require some form of credit at some point in their lives. Whether you use credit cards for unexpected purchases, have a mortgage or need money for home renovations, borrowing money is a need for most of us. It makes sense to understand your borrowing options, how it can affect your credit rating and how much interest you will be paying before you commit to taking on a loan. Here, a firm of specialist Contractor Accountants gives their advice.

The Cost of Borrowing

Before discussing borrowing it is important to understand how paying back your loans makes an impact on your credit and payments. The worse your credit score the more it will cost you to borrow money. Therefore it is important that you take a very long, hard look at the money you borrow and your ability to pay it back. With poor credit you might end up paying more on your borrowing which is money down the drain. As well a bad credit rating will reduce your chances of getting a mortgage when you buy a home and can even affect your ability to rent.

Types of Borrowing

The types of borrowing or means of credit available include:

·         Payday Loans: Payday loans are exactly as their name implies. They are short-term loans that you are expected to pay as soon as payday rolls around again. They can be very expensive and really should only be used in case of an emergency.

·         Plastic Cards: Plastic cards allow you to have access to a certain amount of money based on a credit limit offered by the lender. Credit cards are good to have for two reasons: 1) They allow you to create a good credit rating for yourself by spending and paying off your debt well each month and 2) They make it convenient to shop when you need to as opposed to when you have the money. In general plastic cards are a safe and easy way to have access to extra money. They are also the best way to find yourself in debt fast.

·         Loans: A loan is provided to you through a bank or other financial institution. A loan provides you with a lump sum of money at a specific rate of interest. Monthly payments are expected to be made against the loan in order to pay it back. In most cases you will not be given more than logic dictates you can pay back. However it is important to consider your current debt before you make a commitment to take on more. Loans work well for things such as business start up expenses or when you wish to remodel your home. Car loans are also very common as are student loans.

·         Bank Overdrafts: In many cases you can arrange for a bank overdraft which means should you write a cheque and not have sufficient funds to cover it your bank will provide the funds for you. You will be given a credit limit as well as be charged interest and other charges to have a bank overdraft allowed on your bank account.

Borrowing money is a fact of life for most people. When you are in need of a loan considering all of your options, the amount of time required to pay back the money and the costs associated with borrowing will help ensure you do not get in over your head.

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