Borrowing money is more than accessing additional sources of money. In most cases, borrowing is a series of agreements and contracts that can have significant consequences if you have problems repaying. So, it is essential you know and understand the basics when it comes to good borrowing habits:
- Good debt or bad debt
Borrowing for the important things in life can provide many benefits. A home or a car to get to and from work are examples of where borrowing can provide enormous benefits for you and your family. But there is also bad debt and this is best described where the outcome is where the final benefit was highly questionable or just simply a bad financial choice or the cost of borrowing was sky-high. Using a credit card to pay for gambling is an example of bad debt as the outcome it is used to risk the loss of income. Or borrowing from moneylenders where the rate of interest can exceed 200% (and more) means that those borrowing from such will pay way over the odds. So, if you are considering, ask yourself if the debt is a good one or a bad one.
- Know what your credit report says about you
Once you borrow money from licensed lenders, a record of that loan is recorded on your personal credit report. In Ireland, there are two credit reporting agencies; the Central Credit Register and the Irish Credit Bureau. It is recommended you view a copy of your personal credit report at least once per year. You are entitled to one FREE copy from the Central Credit Report per year, a copy of your details held with the Irish Credit Bureau will cost you €6.
- Pay on time
This is essential to good borrowing, even if you feel you might be a little over-borrowed. Licensed lenders will ask to check your personal credit each time you make a loan application. This can be for a credit card, car loan, PCP, mortgage or student loan. This is why is it is essential to repay your loans on time each month. Not only will this help you to avoid ‘late charges’, which only serve to increase your overall cost of borrowing, it will also mean that you can borrow in the future, if and when you need it most.
- Know the real costs
There are two things that impact how much you pay to borrow. The first is the cost of the money itself and this is determined by the rate of interest charged. The higher the rate of interest, the more you will pay. Lenders are required to advertise their rates of interest as well as the Annual Percentage Rate (APR). The second factor is the length of time you borrow for. The longer the time you take to repay a loan, the more you will repay. For example, if you borrow €1,000 at 5% but are deciding whether or not to repay the loan in 1 year or 10 years, remember the total amount repaid will range between €1,027 and €1,272.
- Borrow long, pay short
As discussed, borrowing over longer periods means that the cost of interest will be higher. But sometimes, in order to protect your personal credit report, you might want to have the lowest monthly repayment in order to make those payments on time each month. A mortgage is a good example, in the early years of borrowing, having a low monthly repayment will allow you to juggle other essential bills. But as time moves on and perhaps