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The Responsible Guide to Borrowing – How to Borrow without Getting into Trouble

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Borrowing money is easy, paying it back tricky. That’s the reality of borrowing for many people but it doesn’t have to be. Everyone can borrow money comfortably, they just need to understand the basics of borrowing, what it means to borrow responsibly, and how to work their finances so that if they experience a financial hiccup, that’s all it amounts to. A hiccup.

What does ‘responsible borrowing’ entail?

‘Responsible borrowing’ entails little more than you’d expect and the basic principles of borrowing in a responsible manner are generally very easy to grasp. It means:

 – Understanding the financial commitment you’re making before you make it

 – Asking creditors for all the information, i.e. your responsibilities and theirs

 – Having a complete understanding of what you’re signing before you sign it

 – Planning and budgeting for repayments and prioritising those repayments

These are the basic principles of responsible borrowing. Whilst they seem simple enough, and they are, why is it so many people suffer the consequences of irresponsible borrowing?

A few things to consider before you borrow money

‘The best way to stay out of debt is to not borrow in the first place’. That’s as true a statement as you’ll ever come across, but everyone needs to borrow money at some point in time, and quite often, it’s actually in their best interests to do so. It’s the times when it isn’t in their best interests to borrow money that they need to understand, identify and then avoid.

So when is a good time to borrow? Interest rates, inflation and similarly important fiscal considerations aside, how does anyone know when it’s the right time to apply for a short term loan to get them through until they next get paid? The answer to that is actually very simple. When borrowing is a necessity not a want and you can repay what you borrow, comfortably and on time. That’s the essence of responsible borrowing.

Still, borrowing solely for your needs and having the ability to repay what you owe isn’t all you need to think about when applying for a loan. There are actually quite a few more things that you need to think about if you’re to borrow responsibly.

 – Understand that not all lenders are equal, i.e. some are better than others

 – Shop around for a competitive interest rate and take into account fees, etc.

 – Don’t overlook the terms and conditions, i.e. read the small print carefully

 – Understand that the shorter the repayment period the less you’ll repay

 – Realise that unless the rate is fixed the repayment amount could change

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These are very important considerations to understand when borrowing money by applying for a short term loan, like a payday loan, to tide you over until you next get paid. But you need to do more than understand these considerations, you need to apply them each and every time you borrow money.

How much can you afford to borrow?

You may have a genuine reason for borrowing, but how can you determine just how much you can afford to borrow and repay? That’s the $64,000 question for many people and it isn’t always an easy question to answer. At least not with any degree of certainty.

Home loans and mortgages aside – they’re something else altogether, though most of the points made here about responsible borrowing still apply – to determine how much you can afford to borrow by applying for a small personal loan you need to create a personal budget.

Whilst there are some great online tools that you can use to work out how much your repayments will be, like loan calculators for instance, you still must understand your personal finances, your income and outgoing expenditure, and creating a budget is the best way to gain an in-depth understanding of how much you can afford to repay.

Once you have created a personal budget you can then use an online loan calculator to determine how much you can borrow. There’s a difference between borrowing and repaying, but that difference should not amount to a fiscal gap which could pose problems. Additionally, as interest rates are often subject to change, you should make sure that you can afford higher repayments so as to not find yourself in financial strife as a result of rising interest rates.

With very short term loans, like payday loans for instance, this isn’t so much of an issue because you’ll be repaying the loan in a short period of time. As little as a few days if you’re using a payday loan in the traditional sense, i.e. just to tide you over until pay day.

However, if it’s a short term loan with a longer repayment period, say one or two years, then this is a very important consideration that you will need to take into account when determining how much you can afford in repayments. As a general rule, it isn’t wise to borrow and have your repayments make up more than 10 – 15% of your salary.

Automate your repayments

Nowadays it’s incredibly easy to automate payments and transfers, so if you’re taking out a short term loan and want to ensure you won’t miss a repayment it’s an excellent idea to automate your loan repayments – if the lender doesn’t deduct them automatically – by setting up an automatic transferral. This is very easy to do if you have internet banking.

Before you set up an automatic deduction, find out what time transactions take place to ensure the money isn’t deducted before your salary is paid into your account. This could work against you by placing you in debt with your bank and that wouldn’t be good for your credit rating. It could also jeopardise your chances of future borrowing.

Borrowing responsibly is simple and straightforward when you know what it entails. Only borrow when you need to and can comfortably repay what you’ve borrowed – you’ll find you can avoid many of the problems that have affected so many people.

About the author

David Griffin David Griffin trained as a graphic designer and now helps PaydayLoan123 with social media. He is a born and bred Londoner who has recently moved out of the capital and is probably missing it a little too much. He enjoys fishing, playing golf and working out at the gym, when he feels energetic enough!

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