Debt is something that many regard purely as a problem to be solved. But there are some points in life when borrowing money can be the most cost-effective strategy in the long term. You might need to borrow in order to keep your car on the road – and thereby allow yourself to travel to work. Or, you might want to invest in home renovations in advance of a sale.
Whatever is motivating your borrowing, it’s vital that you do it in the right way. Let’s take a look at a few borrowing strategies that will help you to safeguard your financial well-being in the future.
Understand Your Credit Profile
Lenders will judge your suitability for borrowing based on your credit score. This is information shared between lenders, which aims to quantify the level of risk you present. The higher your credit score, the more likely you are to secure a loan at a favourable rate.
Credit reports should be regularly reviewed, so that you can understand exactly what kinds of behaviour might earn you a superior rating.
Evaluate Different Types of Loans
Loans come in many different forms. You might seek to secure the debt against an asset that you own, like a house. This is what’s known as collateral. If you default on the loan, in this instance, the asset will be seized by the creditor. This helps to mitigate the risk involved, which can make certain kinds of secured loans practical. For example, the mortgage on a house would be impossible if the lender didn’t retain the right to reclaim the house in question.
Assess the Total Cost of Borrowing
When you’re borrowing, it’s easy to be distracted by the headline rate of interest. But it’s important to consider every variably involved. Over what period of time is the loan going to be repaid, and are there going to be any extra charges if you decide to pay the loan early?
In many cases, it might be necessary to use a special online tool to calculate the real cost of the debt. Make sure that you consider a range of options, rather than settling on the most convenient, obvious solution.
Implement a Repayment Plan
Borrowing sensibly means having a strategy in place to repay the loan. Think about how much spare cash you can set aside every week, and how much flexibility you have to deal with unexpected cash-flow problems.
If you’re having to deal with multiple debts, you might seek to consolidate them into one single loan. You might prioritise the debts that are charging you the most in interest, and think about overpaying in order to drive down the balance on the loan as quickly as possible.
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