Like any tool, borrowing can be useful, but it needs to be handled with care. This week we explore how to make the most of responsible borrowing, while steering clear of problem debt.

Why borrow anyway?

Hardly any of us are strangers to debt, and there are many cases in which borrowing is a normal, and even essential, part of life. For those of us with a mortgage, home ownership would be impossible otherwise. And for one-off expenses, a loan can be a sensible way to spread the cost into manageable payments, enabling us to do things that might not otherwise be possible in one go.

But one of the things that often puts people off responsible borrowing is a fear of falling into problem debt, in which things spiral and it becomes impossible to keep up with repayments or interest. Knowing how and when to borrow, how to spot signs of trouble and how to avoid them then, are all crucial steps to borrowing with confidence.

Keeping things tidy

“How did you go bankrupt?” 
“Two ways. Gradually, then suddenly.”

Ernest Hemingway, The Sun Also Rises

Staying on top of your borrowing isn’t so different from looking after your home. Picture a living room in great condition. Then one day, someone leaves a used tea mug on the table and no one bothers to pick it up. Perhaps the next day a newspaper falls on the floor. Slowly, but surely things fall out of place, rubbish is everywhere, and the living room has become a giant mess.

That is how many people end up in a debt spiral.

Just like keeping a room tidy, keeping on top of debt can be easy, but if you let things slide, it can very quickly get the better of you.

Avoiding problem debt

  • Be savvy about the credit you take out, and shop around for the best rates. Store cards and payday loans can feel quick and convenient. But with some planning, it’s often possible to borrow the same amount at much lower rates elsewhere. For example, London Mutual loans start at just 4.5%.

  • Before you apply for any kind of credit, put together a budget of your income and outgoings. That way you can be sure you can comfortably cover the monthly repayments (including interest). How to put together a monthly budget

  • Only borrow for one-off costs. If you’re finding that you are regularly spending more on day-to-day expenses than your income, then borrowing won’t deal with the underlying issue. Loan interest will simply add to your monthly outgoings, storing up further problems.

  • Be cautious about borrowing to cover existing debts. If you do decide that a debt consolidation loan is right for you, you should always seek to borrow at a lower rate of APR than the original loan.

  • If you find yourself falling behind, don’t bury your head in the sand. Review your budget to identify ways to reduce your expenses so that you can cover repayments. How to get help

  • If, having reviewed your budget, you are still finding it impossible to keep up with repayments while covering essentials such as rent and bills, then get in touch with the lender sooner rather than later. The sooner you get in touch, the more options you’re likely to have.

As a credit union, we’re all about encouraging our members to save and to use debt responsibly, making the most of affordable credit while steering clear of the pitfalls.

For most of us, borrowing is part of life. By following these steps, you can help to make sure it doesn’t take over yours.