In this day and age, it is convenient to borrow money, but convenience comes with a high cost. It is essential that you do not borrow money at a very high interest rate. When it comes to taking out online loans in the UK, you should ensure that you are borrowing money from registered lenders and that you will not struggle with payments.
While all lenders are supposed to practise responsible lending, you should also carefully examine your affordability. No borrower can escape their obligation by shifting the blame to lenders when they failed to assess their affordability before offering them a loan.
Why does responsible borrowing matter?
Borrowing can be a powerful tool when you manage it wisely. It provides you with funds to invest in assets, refurbish your house, purchase a car, and fix temporary cash flow problems.
If you borrow money responsibly, you can build your credit score. It helps you qualify for lower interest rates down the line. Poor habits can lead to high-interest debt spirals, damaged credit ratings, and reduced financial freedom.
How to borrow money responsibly?
Here are the tips to borrow money responsibly:
Understand your credit score
Your credit score is the most important factor that decides whether you will be charged lower interest rates or higher. Therefore, it is vital that you check your credit score regularly. There are three credit reference agencies that maintain your credit report: Experian, Equifax and TransUnion.
Make sure that your credit score is not low because of identity theft. There might be some erroneous information. You will need to dispute them. Credit reference agencies take a month to fix those errors.
To keep your credit score in good condition, you should:
- Pay your debts on time
- Keep your credit utilisation ratio low. It must be under 30%.
- Avoid too many applications within a short space of time.
Keeping your credit score up to scratch will help you qualify for loans easily.
Borrow only what you can afford
Most of the borrowers do not realise that they cannot afford payments. If you fall behind on payments, you will end up with accumulated debt and damage your credit score. Even though a lender is supposed to examine your affordability, you should ensure that additional payments can easily fit in your budget.
In order to ensure affordability, you should use online calculators. They can give you an insight into estimated costs. Actual costs will always be higher than estimated costs. So, have some wiggle room in your budget. Try to cut back on discretionary expenses so you do not struggle with payments.
Borrow money only for one-off essential expenses
Because online personal loans are convenient, it does not mean that you will use these loans to fund your lifestyle. Loans are not recommended to fund holidays and other discretionary expenses.
You should borrow money to finance unavoidable expenses. However, make sure that they are not recurring. For instance, do not use loans to fund rent. You should use them to meet unexpected expenses.
Pay on time
Late or missed payments can damage your credit score. Lenders charge late payment fees that accumulate the debt. You should always pay your debts on time. Since you cannot be certain about your future financial condition, you must have a backup plan.
Prioritising payments over other expenses and setting up direct debits can help you avoid making a default.
Read the fine prints
Many borrowers overlook loan terms. No lender will ever inform you of exact interest rates, APRs, and associated fees before you formally put in a loan application. All these details are provided in your loan agreement. Make sure that you carefully read the small print. Focus on the APR, not just the interest rate, to determine whether or not you can afford to make payments.
Protect yourself from a debt spiral
Not all lenders are registered. It is essential that you carefully research the market. Unregistered lenders could be loan sharks. They tend to charge exorbitant interest rates in order to make money. Make sure that the lender you are borrowing from is registered. You can get these details on the FCA website.
Try to avoid payday loans. They often charge APRs up to 1500%. Consider better alternatives such as credit union loans. They offer lower interest rates.
Choose the right loan
Not all types of loans are suitable for all types of needs. For instance, if you need a very small amount of money, you should use a credit card. Pay off the balance in full to avoid accruing interest. This is a better alternative than payday loans.
If you need money for your business, you cannot apply for personal loans. You will have to apply for a business loan. If you cannot decide on which loan is a better alternative, contact an advisor.
Build good financial habits
Responsible borrowing comes with building good financial habits.
- Try to build an emergency cushion. You should have at least three months’ worth of living expenses. Borrow money only when savings fall short. Having an emergency cushion reduces excessive reliance on debt.
- You should be consistent with your savings efforts. Set up an auto debit mode, so your savings keep growing.
- Set savings goals. For instance, you should create different pots for different goals such as a mortgage deposit, wedding, vacation and the like.
- Differentiate between needs and wants. You should try mindful spending.
The final word
Borrowing is not a bad idea as long as you need money for unavoidable expenses. People often get caught up in an ongoing cycle of debt because they borrow more than they can afford. Experts enjoin that you carefully evaluate your financial condition.
Use online loan calculators and compare interest rates by different lenders. If you find them expensive, consider borrowing money from credit unions, but do not borrow when you can make do without it.
Build an emergency corpus. If you regularly contribute to your savings, you will be able to manage most of your expenses without borrowing.
alex zan 
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